Your CEO calls you on a Friday 4PM: "the peso dropped 7% this week. How much does that cost us?" You have 90 seconds to give a number the board will believe on Monday.
In LATAM this call lands every year. The difference between the CFO who answers with confidence and the one who asks for time is not geopolitics — it is having had a written hedging policy before needing it.
Hedging is not buying forwards because some other company bought them. It is deciding, before the shock, how much volatility your business can absorb without breaking the covenant, freezing hiring, or having to call the bank under pressure.
By the end of this module you'll have it down. Let's go.
Your company exports to the US (60% of revenue in USD) with costs 70% in USD. What is your real exposure?
In plain language
Before the mechanics, the four basic questions.
Why do this at all?
To not operate blind in a region where the currency moves 15-20% a year. Without an explicit FX policy, every move in the exchange rate is a surprise you have to explain. With one, the board knows up front how much volatility you are letting into the P&L and why.
Who uses it?
Treasury builds it with FP&A. The CFO approves. The board reviews — it's one of the few financial topics the board should formally discuss. Treasury executes it day-to-day with the bank desk.
When does it show up?
Annual formal policy review. Whenever there is a structural change in exposure (new market, new product line in another currency, M&A). And always before predictable macro events (elections, Fed moves, institutional portfolio rebalancing).
What if we skip it?
Every FX move flows pure into EBITDA. A bad currency quarter destroys the annual plan. The board asks "why weren't we hedged?" and you have no answer because there was never an explicit decision. The difference between "we didn't hedge by policy" and "we didn't hedge because no one thought about it" is the difference between a CFO and an admin role.
Meet Andina S.A. (FX view)
Same Andina from the rest of the program — LATAM coffee company, $200M revenue, based in Chile, exports to the US and Europe. The FX structure matters: 60% of revenue is USD (export), 40% CLP (local market). 70% of COGS is USD (commodities, imported packaging), 30% CLP (productive wages, local energy). Other opex is 100% CLP.
This creates three distinct types of exposure. Transactional: next quarter's USD revenue that will be converted to CLP at an exchange rate you don't yet know. Translation: USD-denominated assets and liabilities that will be re-measured at close. And economic (the most invisible and the most expensive): your relative competitive position when the peso moves a lot — if your competitor has better hedging, they undercut you for 18 months without FX explaining everything.
The visual below models the three most common policies — no hedge, 50% forward, natural hedge — under three FX scenarios. Tap each scenario to see how EBITDA changes per policy.
Three policies, three scenarios
Three policies, three scenarios, one question: how much volatility can your business absorb? The visual shows it concretely in dollars.
There's no universal right answer. There's a right answer for your business, given your leverage, your covenants, and the board's risk tolerance. But to make that call, first you have to SEE the range.
Interactive visual
Andina S.A. — three FX scenarios, three policies
Pick a scenario
| No hedge | 50% Forward | Natural hedge | |
|---|---|---|---|
| Revenue | $80.0M | $80.0M | $80.0M |
| COGS | $56.0M | $56.4M | $56.0M |
| Gross margin | $24.0M | $23.6M | $24.0M |
| EBITDA | $12.0M | $11.6M | $12.0M |
No hedge
Full USD exposure open. FX variations flow directly into the P&L.
50% Forward
You sell 50% of expected USD at the base rate. You pay a fixed cost for the cover.
Natural hedge
You buy in USD what you sell in USD. Operational reorganization, not a financial instrument.
What you are seeing
In the stress scenario (CLP weakens), No hedge MAKES money vs base (USD revenue is worth more in CLP), but loses twice as much in the opposite scenario. 50% Forward halves both swings — gives up some upside, gains a lot of stability. Natural hedge eliminates the swing almost entirely, with no financial cost. The question is never "hedge yes or no?" — it is "how much volatility can my business absorb?"
What you see in the visual is why the CEO's Friday 4PM question isn't trivial: the answer depends on what policy you have. No hedge: the business gains or loses $1.5-2M of EBITDA for every 10% move. 50% Forward: range halves. Natural hedge well implemented: range is nearly zero.
Natural hedge sounds ideal but has cost: it implies reorganizing the supply chain or pricing. Not free and not always possible. That is why most companies end up in a mix — some natural hedge plus some financial instruments — calibrated to the board risk profile.
The mechanics: how to build a policy
- Measure NET exposure, not gross. USD revenue minus USD COGS minus USD opex. What matters is the balance after natural offsets. Without this, you end up hedging positions already hedged by the operation.
- Define the explicit horizon. Are you hedging next quarter? The next 12 months? Investments out 3 years? The answer changes the instruments. Quarterly forwards are different from multi-year options.
- Set a target hedge range, not a fixed number. "We hedge between 40% and 70% of rolling 12-month exposure" leaves room for tactical decisions inside a frame. "We hedge exactly 50%" is a rigid rule the market will eventually punish.
- Tie the policy to bank covenants. If your debt requires Debt/EBITDA < 3.5x, hedge enough not to breach that covenant in the stress scenario. That is the litmus test of any policy — it survives the scenario or it is not a policy.
- Report the open FX position monthly to the board. One line: "net open exposure = $X M, hedged at Y%, sensitivity to a 10% move = $Z M of EBITDA." If the board does not see this number, they have no information to judge.
- Document why you are NOT hedging the rest. "We leave $5M unhedged because hedging that tail costs Z and covenant sensitivity still tolerates it." That is defensible. "We did not hedge it" without more is not.
- Transactional exposure. P&L moves next period from already-committed foreign-currency cash flows. The most concrete and the first to hedge. Typical instrument: forward, future, swap.
- Translation exposure. Accounting re-measurement of foreign-currency assets and liabilities at close. Does not move cash but moves equity and sometimes covenants. Whether to hedge depends on covenant impact and hedge cost.
- Economic (competitive) exposure. Your relative pricing position when FX moves. If your competitor has better hedging, they can undercut you for 12-18 months. The most expensive, the most invisible, the hardest to hedge with financial instruments — this is where natural hedging (supply chain, local-currency pricing) wins.
- Practical rule: if your CFO only talks about transactional hedging, they are hedging the symptom. If they talk about all three, they are thinking like a real CFO.
Adversarial check
Adversarial check
1.The board asks: "why aren't we 100% hedged? The peso is moving." What do you answer?
2.Your natural-hedge plan says: "buy raw material in USD to match USD revenue." Your procurement team says: "the local CLP supplier is 8% cheaper." Who wins?
3.What's the difference between transactional and economic hedging?
Exit checklist
Suggested re-review: every structural change in exposure or every 12 months, whichever comes first.
Optional
Go deeper
Sources and books to dig into the original material