What should a hedging policy include?

Its objective, the exposures it covers, the share of each to be hedged over each period ahead, the instruments allowed and those excluded, the banks the business may deal with, who has authority to deal and who checks and settles the trades, how compliance is reported to the board, what happens when cover falls outside a band, and how often the policy is reviewed. A short policy that is followed is worth more to a lender than a long one that is not.

How much of its currency exposure should a business hedge?

There is no single right share. It depends on how certain the exposure is, how thin the business's margins are, whether it can pass currency moves on to customers in its prices, and how far ahead its own prices are fixed. Many policies hedge more of the near months than the later ones, because near receipts are more certain. A lender reads whether the bands chosen fit those facts, not whether they match another business's.

Who approves a treasury policy?

The board, which then delegates day-to-day hedging to management within the policy's limits. Management reports compliance back, typically monthly or at each board meeting, and the board reviews the policy itself at intervals, often each year or when the business changes. A departure from a band is normally reported to the board and either corrected or approved as an exception, so that the record shows a decision rather than a drift.

Does a bank require a hedging policy?

A private business is not generally required by law to have one, but a lender with material exposure to a borrower's currency or interest rate risk will often ask to see it, and some facility agreements require one to be maintained or delivered. Separately, a facility may contain its own hedging condition, such as a minimum share of the loan fixed. The policy and that condition should be consistent, so that following one does not breach the other.

// WORKED EXAMPLEWHAT THE DOCUMENT DOES

Hedging Policy: What a Lender Reads in It

The board's rule on paper, read against the hedges on the books.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07

// THE SHORT ANSWER

A hedging policy, often called a treasury policy, is the board's standing instruction on how much interest rate and currency risk the business will carry, and a lender reads it as a yardstick more than as a document. It replaces judgement made trade by trade with bands set in advance and a named owner for each decision. Because the hedges actually held can be measured against it every month, a gap between the two is itself information: either the business is changing its mind without telling its board, or nobody is reading the policy.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 02 — Aoraki Trade Exports. Paid in USD, costs in NZD, asking for a NZ$6m multi-currency facility. The MD won't say which currencies. Your call first, then the senior banker's.

Read the file →

// 01 — WHY A LENDER ASKS FOR ONE

A credit decision rests on a forecast of margins and debt service, and for a business with foreign-currency sales or floating-rate debt that forecast assumes something about exchange and interest rates. Hedging is how the business makes the assumption hold for a while. A lender wants to know whether that hedging is a rule or a habit: whether the cover in place reflects a decision the board made and can be held to, or the finance manager's view of where the currency is going.

The policy works in both directions. It sets a minimum, so that protection does not lapse unnoticed, and a maximum, so that hedges stay tied to real exposures and do not become positions taken on the market. The maximum matters to the bank as much as the minimum. A forward written against a receipt that does not come is a debt to the bank with nothing behind it, and a bank sizing its derivative credit limit reads what the policy allows.

// 02 — WHAT A POLICY USUALLY CONTAINS

Policies differ in length and detail, but most cover the same ground. An objective, usually framed as reducing the effect of rate movements on cash flow and earnings, not making money from them. The exposures in scope: forecast foreign-currency receipts and payments, floating-rate debt, sometimes commodity costs. Cover bands by horizon, often layered, with a higher share hedged in the near months than further out, because near receipts are more certain. Permitted instruments, such as forwards, window forwards, bought options, swaps and caps, and those that are not permitted, often including options sold outside a collar. Approved counterparties, frequently limited to the banks that hold the business's security. Who may deal, who confirms and who settles, kept apart. How compliance is reported, how a breach of a band is handled, and how often the board reviews the policy.

Accounting adds a reason for writing it down. A business that reports under IFRS 9 or its New Zealand and Australian equivalents and wants hedge accounting must document, when each hedge begins, its risk management objective and strategy; the policy is where that strategy normally lives. UK groups reporting under FRS 102 have their own hedge accounting rules in section 12.

// 03 — THE EXAMPLE

A yarn spinner, constructed for this page like every figure in it, sells mainly in US dollars and pays its wages and wool costs at home. Its board-approved policy sets these bands, which are the example's and not offered as the right levels:

Forecast US dollar receipts, months 1–6 60% to 90% hedged

Forecast US dollar receipts, months 7–12 30% to 60% hedged

Term debt, interest rate 50% to 80% fixed

Its facility separately requires at least half of the US$18m term loan to be hedged. At the lender's annual review the hedge report reads:

Forecast Hedged Cover Band

Months 1–6 11.0m 5.5m 50% 60–90% below

Months 7–12 7.0m 4.9m 70% 30–60% above

Term debt 18.0m 12.6m 70% 50–80% inside

Next year, loan amortised to 15.0m, swaps unchanged:

Term debt 15.0m 12.6m 84% 50–80% above

Each line says something different. The near months are under-hedged because the finance manager stopped adding cover when the home currency weakened, expecting it to weaken further: a view on the market, taken without the board. The later months are over-hedged for a different reason, with no view on the market at all. A customer loss cut that half-year's forecast from US$12m to US$7m, and forwards booked at 41% of the old forecast now cover 70% of the new one. If receipts fall again, some of those forwards will have nothing to settle against.

The interest line is inside the band and above the facility's minimum today, but the swaps do not amortise with the loan, so next year the same swaps cover 84%, above the policy's ceiling, without anyone dealing. The lender's questions follow: did the board see and approve each departure, what is the plan to bring cover back inside the bands, and does the derivative limit still fit the book.

// 04 — THE POLICY BESIDE THE FACILITY'S CONDITION

The policy is the business's rule; a hedging condition in the facility agreement is the bank's. They should fit inside each other. Here the facility's minimum of 50% sits at the bottom of the policy's band, so a business inside its policy is inside its facility. Had the policy allowed 0% to 80%, the board could have followed its own rule and breached the bank's. A lender reading both checks the definitions as well as the numbers: whether the facility measures cover on the loan as drawn or as committed, and whether a cap or collar counts.

Two measures the policy relies on are easy to confuse. Currency cover is usually expressed as a share of forecast receipts over months ahead, the hedge cover a lender tracks for an exporter. Interest rate cover is usually a hedge ratio: a percentage of the debt at a point in time, which moves as the debt does.

DEFINED IN ONE PARAGRAPH → · HEDGE COVER, DEFINED → · HEDGE RATIO →

// 05 — WHERE IT DECIDES A FILE

At origination, the policy shapes the derivative facilities: the lender can size lines to the cover the policy permits rather than to what the business asks for on the day. At review, it gives the lender a fixed point against which drift is visible, as in the example. In difficulty, the policy is often the first thing to go. A business short of cash may close hedges in its favour to raise money, or let cover lapse rather than use credit lines, and both show up as departures from the policy before they show up in the accounts. That makes a policy breach one of the early warning indicators a careful lender watches.

FINANCIAL MANAGEMENT, READ BY A LENDER → · PRODUCT FILE: FX FACILITY → · INTEREST RATE COLLAR →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

IFRS Foundation, IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39), Project Summary, November 2013 — pages 6 and 8 — Explains that the IFRS 9 hedge accounting model was aligned more closely with entities' risk management activities and adds disclosure of their risk management strategy — section 02.

// QUESTIONS PEOPLE ASK

What should a hedging policy include?: Its objective, the exposures it covers, the share of each to be hedged over each period ahead, the instruments allowed and those excluded, the banks the business may deal with, who has authority to deal and who checks and settles the trades, how compliance is reported to the board, what happens when cover falls outside a band, and how often the policy is reviewed. A short policy that is followed is worth more to a lender than a long one that is not.
How much of its currency exposure should a business hedge?: There is no single right share. It depends on how certain the exposure is, how thin the business's margins are, whether it can pass currency moves on to customers in its prices, and how far ahead its own prices are fixed. Many policies hedge more of the near months than the later ones, because near receipts are more certain. A lender reads whether the bands chosen fit those facts, not whether they match another business's.
Who approves a treasury policy?: The board, which then delegates day-to-day hedging to management within the policy's limits. Management reports compliance back, typically monthly or at each board meeting, and the board reviews the policy itself at intervals, often each year or when the business changes. A departure from a band is normally reported to the board and either corrected or approved as an exception, so that the record shows a decision rather than a drift.
Does a bank require a hedging policy?: A private business is not generally required by law to have one, but a lender with material exposure to a borrower's currency or interest rate risk will often ask to see it, and some facility agreements require one to be maintained or delivered. Separately, a facility may contain its own hedging condition, such as a minimum share of the loan fixed. The policy and that condition should be consistent, so that following one does not breach the other.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE FIRST QUESTION · THE LOAN · HEDGES

A borrower has a US$10m floating-rate loan and an interest rate swap fixing the rate on US$15m.

What do you ask first?

6 MORE ON THE LOAN · HEDGES →WHERE DO YOU READ FROM? THE PLACEMENT →

THE GLOSSARYIN ONE PARAGRAPHHedging policy (treasury policy) What is a hedging policy, and what does a bank look for in one?