Back-to-Back FX Hedging: Why To Do It, and What You Need

When it comes to foreign currency risk management, back-to-back hedging sits near the deep end of the pool. It’s an advanced strategy, but – fortunately – one that’s not out of reach for most corporate Treasury departments. Here’s why.

Typically, back-to-back hedging is a strategy to be employed when a company needs to:

  • Manage an in-house bank program;
  • Centralize trading but decentralize hedge ownership for accounting purposes (to generate gains/losses in entities with the non-functional exposure per ASC 815);
  • Centralize trading but decentralize hedge ownership for tax purposes (to generate derivative gains/losses to offset entity gains/losses in the same tax jurisdiction);
  • Create economies of scale by hedging consolidated information (hedging similar currency pairs across multiple entities or subsidiaries, and reducing trading volume and related transaction costs), or;
  • Analyze discrete FX gain/loss performance reporting for each individual entity.

When these drivers are present, Treasury departments can realize transaction-based cost reductions and increased operational efficiency by consolidating and hedging net global exposures with fewer derivative transactions – the benefit of back-to-back hedging.

Many treasury organizations forgo these operational, accounting, reporting and tax benefits because they aren’t prepared to manage the complex spreadsheets these efforts would require, or because their systems are inadequate. We invite organizations to automate their programs with Hedge Trackers’ CapellaFX, which automatically creates a third-party consolidated trade from selected exposures, then creates each of the internal trades for both the trading and the exposed entity. The transition to a best-in-class software solution is surprisingly quick – as little as a few days or weeks – and the benefits start on Day 1.

Back-to-back hedging has been available in CapellaFX since its release, and – like Hedge Trackers’ RTZ automated remeasurement hedge performance reporting feature – is native to the system; it does not require additional modules or development to implement across your organization.

If you’re thinking about back-to-back FX hedging, or need to make sure you’re getting maximum value and risk mitigation from an existing program, our consultants would be happy to chat. Contact Hedge Trackers today, or call 408-350-8580.