Winning the FX Risk Reduction Battle: Eisenhower's WWII Tactics and Modern Hedging Strategies

CalendarJune 22, 2023

In our previous blog, we explored the importance of visualizing cash flow and balance sheet risks as a precursor to better understanding which FX hedging strategy is a tactical fit for a specific financial period in the overall cash flow cycle.

Building on that foundation, we'll now dive into the world of finance where managing risks is akin to leading troops into battle while managing the unknowns. The FX strategies and ongoing decisions made by financial managers can have a significant impact on the profitability of their operations. In this blog, we will draw some parallels between General Dwight D. Eisenhower's tactics during World War II and modern foreign exchange (FX) risk management strategies. We will focus on specific hedging tools, namely Futures, Forwards, Swaps and Structured Currency Options, that can deliver desired outcomes. We will also talk about how layering FX hedges and deciding on various aspects, such as hedge durations and optimal hedge levels, can be part of overall planning.

Comprehensive FX Hedging: Big picture view and attention to detail. General D. Eisenhower, Supreme Commander of the Allied Expeditionary Force in Europe during World War II, was a logistics expert who planned his campaign tactics meticulously to implement his big-picture strategy and achieve the objectives. His education and experience gave him a command of military tactics, including the “combined arms” approach, where different military forces worked together in harmony to achieve the common goal.

In the same way, a comprehensive FX hedging strategy may include combining hedging tools to help minimize currency risk. A strategy based on clear objectives and careful planning, coupled with the flexibility to recognize and capitalize on opportunities, can help businesses achieve their goals.

By employing various types of hedges, companies can protect themselves from adverse currency fluctuations and achieve their financial objectives. Broadly speaking, below are main categories of hedging tools available.

Futures Hedging: Currency Futures are exchange-traded hedging tools that provide companies with a guaranteed exchange rate for a multiple of 100k amounts and usually expire once a month on a predetermined date. They are price-efficient but often inflexible and less customizable for real-world underlying business needs. Futures also involve setting up a margin account where money is pulled or pushed, based on the out- or the in-the money levels of outstanding hedges. Thus this also requires monitoring of the cash required to keep the margin account funded optimally. In a situation where the domestic currency is forecast as likely to weaken, a firm can enter into a futures contract to sell its foreign currency receivables, and thereby mitigate the negative impact of the foreign currency depreciation.

Forward Contract Hedging: Forwards involve entering into a contract with a financial institution or a broker to buy or sell a specific currency at a predetermined rate on a future date. These are traded ‘over-the-counter’ (that is, off-exchange), and are highly customizable in terms of amounts booked, expiry dates, and flexibility of drawing down on them.

Forwards can be booked ‘Open-’, ‘Window-’, or ‘Fixed dated’ to match the unique cash flow requirements of the hedger. At times a financial institution will not allow fully open forwards, despite the need of the hedger. This could expose the hedger to interest-rate risks associated with the currencies involved if pre-delivered outside the window. Assessing the nature of cash flows and consulting with your dealer to build the right level of flexibility for your business can help reduce this concern.

Example: A company with a major payment in foreign currency can use a forward hedge to lock in the exchange rate and mitigate the risk of the domestic currency depreciating before the payment is due.

Non-Deliverable Hedge: In some cases, a client may be exposed to FX risk even if they do not have the foreign currency to transact. If you are an exporter or importer where your receivables and payments are in local currency, but the amount fluctuates and is determined by the value of foreign currency, you are exposed to FX risk. Non-deliverable Forwards (NDFs) and Options (NDOs) can be used to help reduce that risk.

Example: A hog farmer that prices livestock in USD but receives proceeds in CAD can benefit from using a non-deliverable forward to secure a known guaranteed conversion rate. In this case, the farmer doesn’t have deliverable USD to settle the future hedge, but is exposed to FX risk from the time of the sale to the receipt of CAD. The NDF is net-settled on expiry and the known net FX rate is achieved.

Swaps: A Currency Swap usually involves exchange of interest or principal to help achieve cost or market-timing efficiencies. This would involve two transactions, one near-dated and an opposite far-dated transaction. They can be net-settled too. One practical example is below.

Example. A business is deep into its USD line of credit (waiting for USD receivables to come in) but has a large balance in its CAD account. To avoid paying interest on the USD line of credit, the business could consider entering into a Swap. This entails buying USD for the near term to fund the USD line of credit, and selling it back (buying CAD) at a specific future date to match the timing of USD receivables. Often the cost of swaps is less than the interest on the of line of credit.

Currency Option Hedge: We will look at two main structures, Vanilla options and FX Structured options.

Plain Vanilla Option: The Vanilla is a “premium” option structure. By paying a premium upfront, , a company can purchase a currency option which gives them the right, but not the obligation, to buy or sell a specific amount of a currency at a predetermined rate within a specified time frame. It gives the hedger protection when they need it, but the hedger can also let the option expire if the spot rate is more advantageous spot rate at expiry. Typically, like insurance premiums, the option premium is non-refundable.

A Vanilla Option gives the hedger full (100%) optionality for the cost of the premium. There are other details in terms of how premiums can change depending on variables like flexibility of early usage, duration of protection, and the level of rates protected relative to spot rates at the time. For this blog we are keeping it to basic details.

FX Structured Option: In certain market conditions and business situations, an Option without full optionality can address the hedging needs of some businesses. This is where structured currency options, which don’t require an upfront premium, can make a lot of sense. Most structures protect against unfavorable market movements while allowing for some limited upside.

With regard to what is achievable, FX structured options usually fall somewhere between a Forward Contract (least flexible in terms of FX rate achievable and amounts dealt; no premium is paid but there is no participation if spot rates become better than the rate specified in the Forward) and a Plain Vanilla (most flexible in terms of FX rate achievable and amounts dealt; premium paid but 100% participation in more favourable movements).

Structured options can be used to achieve specific FX objectives, and are highly customizable to individual business needs. Many variants exist; a detailed discussion with an FX expert can help you understand how they can be tailored to the unique nature of your FX exposure and desired objectives.

What’s next?

After understanding the key hedging tools that are at one’s disposal, a business would then consider their unique FX situation and collect vital FX details to learn how these tools can help address potential adverse market movements and achieve overall business goals. These macro level details may include factors like these:

  • Annual FX requirements (all the currency exposure)

  • Budget rate used for sales, pricing, and/or business planning

  • Hedging time horizon aligned with business planning, such as monthly or quarterly and for how long

  • Products to be used for hedging

  • Allowable leverage levels within the hedging approach

In our next post to this blog, we will dive deeper into other considerations when planning and accommodating one-off FX requirements. We will also introduce Rolling and Layering hedge strategies, and how to create, execute, monitor, and test the effectiveness of the planning.

Eisenhower's WWII tactics, characterized by disciplined thinking, meticulous planning, and full understanding of all the tools and capabilities of the armed forces in his sphere, provide a set of valuable metaphors that can help a business strategize FX risk management.

By employing a layered hedging approach that incorporates futures hedges, forward hedges, money market hedges, and currency option hedges, companies can protect themselves from adverse currency fluctuations and achieve their financial objectives. Just as Eisenhower led his forces to victory, a well-planned and executed FX risk management strategy can help companies triumph in the financial battlefield.


Moiz Mujtaba

Moiz Mujtaba

Director Product Management - CRMS

Moiz Mujtaba brings 14 years of B2B, B2C payments tech experience with academic background in Finance as a CPA (Australia) and an ACMA (UK). He currently leads the development of Corpay’s FX risk management product line.

Dev Dabas

Dev Dabas

SVP, Winnipeg Branch Manager

With over 20 years of FX experience, Dev specializes in designing and implementing risk management strategies that are tailored to clients’ needs. He holds MBA and is certified in Foreign Exchange, Capital and Derivatives Markets in Canada and India.