Five Common Mistakes When Setting Up a Hedging Program

Minneapolis, MN | March 14, 2024 | By: John Trefethen, Director and Co-Founder

Setting up a hedging program can be complex, and companies often make mistakes that can lead to inefficiencies or increased risks. What follows are five common mistakes:

Inadequate Risk Assessment. Companies sometimes fail to conduct a thorough assessment of their risks before implementing a hedging program. This can result in overlooking certain risks or underestimating their impact, leading to ineffective hedging strategies.
Overlooking Operational Risks. Operational risks can include supply chain disruptions, regulatory changes, or geopolitical events. Neglecting to hedge against operational risks can leave a company vulnerable to unexpected losses.
Poor Hedging Strategy Design. Companies may design hedging strategies without considering their specific risk exposures and business objectives. This can result in using inappropriate hedging strategies or employing strategies that are too complex or costly.
Lack of Monitoring and Review. Once a hedging program is implemented, companies may fail to monitor and review its effectiveness on a regular basis. Market conditions and business circumstances can change over time, so it’s important to continuously assess whether the hedging program remains aligned with the company’s goals and risk profile.
Ignoring Accounting Implications. Hedging activities can have significant accounting implications, particularly under hedge accounting standards ASC 815 and IFRS 9. Companies may underestimate the complexity of hedge accounting requirements or fail to properly document hedge relationships, leading to financial reporting errors or compliance issues.