Hedging FX and rate risk without gambling: what the consensus gets wrong

August 18, 2026 · 5 min · Free, with full transcript

Most treasury teams treat derivatives as insurance policies and stop there. The real discipline is knowing which exposures are worth hedging at all, and at what cost to the business.

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Welcome to the Leaders Insights podcast.

Today's episode, hedging FX and rate risk without gambling, what the consensus gets

wrong.

The Euro just punched through 1.18 against the dollar this week, and I've watched three

CFOs on LinkedIn brag about the hedges that saved them.

You wrote today that most of them are basically gambling.

Explain yourself.

Happy to.

When the Euro dollar rate moves 5 cents in a quarter, everyone who bought a forward contract,

an agreement to lock tomorrow's exchange rate today, suddenly looks like a genius.

But looking smart after the fact isn't a strategy.

Half those teams hedged exposures that didn't need hedging and paid a premium to sleep

better.

That's not insurance.

That's paying for a feeling.

Hold on.

Isn't that exactly what Treasury is supposed to do?

Remove uncertainty?

No.

Treasury is supposed to protect the business from moves that would actually hurt it.

There's a difference.

If I'm a European exporter and 40% of my revenue is in dollars, a weaker dollar genuinely

dents my margin.

Hedge that.

But if I've got a small dollar receivable due in three weeks against a big dollar payable

in four, those two roughly cancel.

The consensus buys a forward on each leg anyway, pays the spread twice, and calls it discipline.

So the sin isn't hedging too little.

It's hedging things that offset each other.

That's the most expensive one, yes.

It's called gross hedging instead of net hedging, covering every exposure individually instead

of the leftover after they cancel.

I saw a mid-cap industrial last year running 200-plus forward contracts across 11 currencies.

When we netted the exposures, their real risk was about a fifth of what they were

hedging.

They were paying banks roughly 800,000 euros a year in bid offer spread.

The gap between the buy and sell price the bank pockets, to hedge risk that already netted

itself out internally.

800,000 to protect against nothing.

That's a great slide in a terrible quarter.

But surely someone signed off on that.

Everyone signed off.

That's the problem.

Nobody gets fired for over-hedging.

You get fired for the one time you were exposed and it went against you.

So the incentive is to smother everything.

And the cost hides in a hundred small spreads.

Nobody adds up.

My rule?

If you can't name the P&L line a hedge protects and the size of the hit if you don't, you

don't hedge it.

Let's talk rates because that is where 2026 got interesting.

The Fed's held around 4% and the ECB's drifting lower.

Doesn't that divergence force your hand?

It tempts your hand, which is different.

When U.S. rates sit above European ones, the forward market makes hedging dollars into

euros look almost free.

Sometimes you get paid to do it through the interest rate differential.

And that's precisely when people over-hedge because it feels cheap.

Cheap isn't the same as necessary.

I'd rather carry a small, understood, open position than lock in a hedge just because

the carry flatters me this month.

You're describing deliberately staying exposed.

A board hears that as recklessness.

Then reframe it for them.

Every unhedged euro is a decision.

And every hedged euro is also a decision.

Both cost something.

The reckless move is pretending hedging is free.

I tell boards, here's our net exposure.

Here's the worst plausible move.

Say the dollar weakening 8% based on the 2025 swing.

Here's the euro impact.

And here's what full coverage costs versus covering the top 70%.

Then they choose with numbers instead of nerves.

One vendor stat I keep seeing.

Kariba claims companies misforecast their FX exposure by double digits.

Do you buy it?

Kariba sells treasury software, so take the exact figure with salt.

Why inteate?

They're incentivized to show you're flying blind.

But directionally?

Yes.

Most exposure forecasts are stale spreadsheets updated monthly while the business moves daily.

You can't hedge intelligently on numbers three weeks old.

Fix the forecast before you touch a single derivative.

Give me the one thing a treasurer does Monday morning.

Pull every open hedge.

Keep them by currency and net the opposing positions.

Whatever cancels out, unwind or let expire.

You'll typically find 20 to 40% of your book is protecting risk that was never there.

And that spread comes straight back to the business.

Done.

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