An FX policy is the document that turns currency exposure from an accidental position into a deliberate decision. Most UK SMEs with international exposure don’t have one. The CFO hedges (or doesn’t) based on instinct, the rate level at the time, and whoever happens to be asking. When personnel change or the founder steps back, the institutional memory walks out the door. A documented FX policy is the cheapest piece of treasury infrastructure a UK business can build, and the one that compounds the most over five years.
This guide explains the seven sections of a working FX policy, with practical guidance on what each contains and how UK SMEs typically resolve the underlying decisions. For related Business FX content, see our companion guides on FX strategy for UK importers, FX strategy for UK exporters, currency hedging for UK small businesses, and forward contracts for UK businesses.
Why UK SMEs Need a Documented FX Policy
The cost of not having a written FX policy isn’t obvious until something goes wrong. A CFO leaves; the new one inherits a portfolio of half-hedged exposures with no record of the original logic. A board member challenges the hedge ratio in a quarterly meeting; the answer is “it’s what we always do,” which is not an answer. A material rate move catches the business in the worst-case position; the post-mortem reveals nobody had decided what the worst-case position should be.
A documented policy resolves these patterns by removing the personal stakes from a structurally uncertain process. The CFO who hedged at 1.18 looks like a hero at 1.13 and a fool at 1.23 — unless there’s a written policy that says “we hedge X% of confirmed orders at order-confirmation stage regardless of rate level,” in which case the hedge is the result of policy compliance rather than a personal call. Policy-driven decisions survive personnel changes, board scrutiny and adverse rate moves. Instinct-driven decisions don’t.
The Seven Sections of a Working FX Policy
Every working FX policy resolves seven specific questions. The level of formality varies by company size, but the questions are universal.
1. Governance — Who Owns the Decisions
Three roles need named owners:
- Policy owner — typically the CFO or Finance Director. Responsible for the policy itself, the framework, and any policy changes.
- Execution owner — typically a finance manager or treasurer. Responsible for day-to-day execution within the policy: booking forward contracts, managing limit orders, monitoring exposure.
- Approval thresholds — the size of FX transaction the execution owner can book without further approval, the threshold above which CFO approval is required, and the threshold above which board approval is required.
For a UK SME with £1m–£10m of annual FX exposure, typical thresholds are: under £100k transactions executed by the finance manager, £100k–£1m approved by the CFO, above £1m requiring board approval. Tailor to your business size and risk appetite.
2. Exposure Measurement — What You’re Actually Tracking
The policy needs to define what counts as FX exposure. Three layers should be tracked separately:
- Transactional exposure — invoiced and contractually committed amounts in foreign currency. Both AR (invoices raised, awaiting payment) and AP (purchase orders raised, awaiting payment).
- Forecast exposure — expected foreign-currency receipts and payments not yet contracted. Typically 6–12 month forward looking, with confidence levels declining as the horizon extends.
- Translation exposure — foreign-currency assets and liabilities on the balance sheet. Less commonly hedged for SMEs, but worth tracking for businesses with overseas subsidiaries or fixed assets.
The policy should specify the cadence of exposure measurement (typically monthly), the format of the exposure report, and who receives it.
3. Hedge Ratio Rules — What Proportion You Cover
This is the substantive heart of the policy. For each layer of exposure, the policy specifies the percentage to be hedged.
Common UK SME starting points:
- Confirmed transactional exposure: 60–80% hedged at confirmation stage.
- Forecast exposure 0–6 months: 30–60% hedged on a layered basis.
- Forecast exposure 6–12 months: 10–30% hedged with declining ratios.
- Forecast exposure 12+ months: typically unhedged, with quarterly review.
The right ratios for any specific business depend on margin sensitivity, sector, and competitive position. A retailer running 35% gross margin can carry more open exposure than a wholesaler running 8% margin. The board sets the ratios as a function of business risk tolerance, not market view.
Crucial discipline: the policy must specify that hedge ratios are not adjusted based on a view about where the rate is going. “We think GBP is going up so we’ll under-hedge” is trading, not policy. The policy applies regardless of rate level.
4. Approved Instruments — What Tools Are In Bounds
The policy lists which hedging instruments are approved and any conditions attached. For most UK SMEs, the approved set is:
- Spot transfers — always approved.
- Forward contracts — approved for any payment up to 12 months ahead, against a specific transactional exposure.
- Limit orders — approved for converting receivables when there’s flexibility on timing.
- Regular payment plans — approved for recurring monthly flows.
Currency options, NDFs and exotic structures should generally be excluded for SMEs unless the company has dedicated treasury expertise. Speculative trading positions — buying currency without an underlying commercial exposure — should always be explicitly prohibited. The policy should make clear that hedging instruments are used to reduce exposure, never to take new exposure.
5. Counterparty Rules — Where You Execute
Three sub-decisions sit under the counterparty rule:
- Provider selection — which providers the company is approved to use. Typically a primary specialist broker for forwards and large transactions, plus a UK bank for fallback or specific use cases.
- Concentration limits — the maximum exposure the company will hold with any single provider, particularly relevant for forward contract positions in the money.
- Regulatory verification — the policy should require all approved providers to be FCA-authorised (or operate via FCA-authorised partners) with safeguarded segregated client accounts. See our guide on are currency brokers safe for the full regulatory framework.
For a UK SME, a typical setup is one primary specialist (Cambridge Currencies works exclusively with FCA-authorised partners Currencycloud FRN 900199 and ScioPay FRN 927951), plus a backup relationship at the company’s main UK bank. The bank handles emergency execution if the primary provider has an outage; the specialist handles all routine FX activity.
6. Reporting Cadence — What Gets Reviewed When
The policy should specify the reporting rhythm:
- Monthly: exposure report, hedge ratio against policy target, recent forward contract bookings, average effective rate achieved versus market.
- Quarterly: summary to the CFO and (for larger businesses) to the board, including any exceptions, breaches and policy interpretation issues.
- Annually: full policy review, including hedge ratio recalibration, instrument list review, counterparty review, and any changes flowing from business model changes.
The reporting discipline is what makes the policy a living document rather than a filed PDF. A policy reviewed once at adoption and never again becomes stale within 18 months.
7. Exception Handling — What Happens When Things Don’t Match
No policy survives every situation. The policy needs a defined process for exceptions:
- What constitutes an exception (e.g. a hedge ratio breach, a counterparty unavailability, a market disruption).
- Who can authorise an exception (typically the CFO for routine, the board for material).
- How exceptions are documented and reviewed.
- How recurring exceptions trigger a policy review.
Recurring exceptions are usually a sign the policy is wrong, not that the situation is unusual. If you’re breaching the hedge ratio every quarter, the ratio is wrong; fix the policy, don’t keep approving exceptions.
A Practical Worked Example
To make the framework concrete, here’s how a typical UK SME importer with £2m of annual EUR exposure resolves each section.
- Governance: CFO is policy owner, finance manager is execution owner. Approval thresholds: under £50k by finance manager, £50k–£500k by CFO, above £500k by board.
- Exposure measurement: monthly review of confirmed PO exposure (typically 3–6 months forward) and forecast exposure (12 months forward). Reported to CFO.
- Hedge ratios: 70% of confirmed PO exposure hedged at confirmation. 30% of forecast 0–6 months hedged on a layered basis. 10% of forecast 6–12 months hedged. Forecast beyond 12 months unhedged.
- Instruments: spot, forward contracts, limit orders, regular payment plans. No options, no speculative positions.
- Counterparties: primary specialist broker for all routine activity (FCA-authorised partner), main UK bank as backup. Concentration limit: no more than £5m of forward contract notional with any one provider.
- Reporting: monthly exposure and hedging report to CFO. Quarterly summary to board. Annual full review.
- Exceptions: CFO can authorise hedge ratio breaches up to 20% of policy target for one quarter. Anything material to the board.
The policy fits on two pages. Refining it takes about half a day with the CFO and finance manager. The compounding benefit over five years is large.
Common Mistakes UK Businesses Make on FX Policy
Confusing hedging with trading. Hedging reduces exposure to known commercial flows. Trading takes new exposure based on a market view. The policy must explicitly prohibit trading positions; otherwise hedge ratios drift with rate moves and the discipline breaks down.
Setting hedge ratios on rate level. “We’ll hedge more if the rate gets above 1.20” is a market view dressed as policy. The right framing is: “we hedge X% of confirmed exposure regardless of rate level.” If the policy needs to flex with rate level, write the flex into the policy explicitly with defined triggers.
No counterparty diversification. Single-provider concentration is operationally risky. Have a backup arrangement that can execute within hours if needed.
Vague language. “We will hedge an appropriate proportion of our exposure” is meaningless. Use specific percentages, specific timeframes, specific instruments. Vague policies don’t survive disagreement.
No annual review. A policy written in 2024 may not match the business in 2026. Annual review is the discipline that keeps the policy relevant.
Treating the policy as a finance document only. The board, sales leadership and procurement leadership all need to understand the policy because it constrains pricing decisions, contract terms and supplier relationships. Circulate the policy beyond finance.
When to Write Your First FX Policy
Three triggers usually prompt the first policy:
- Crossing £1m of annual FX exposure. Below this, ad-hoc execution can survive. Above it, the cost of not having a policy starts to show in the rate variance and the audit trail.
- Hiring a CFO or finance director. The new hire wants to inherit a documented framework, not someone’s notes.
- Board scrutiny on FX results. The first time a board challenges the hedge ratio is the last reasonable moment to write the policy. After the third quarter of unfavourable variance against a notional benchmark, you’ll be writing it under pressure.
Anthony Bull, CEO of Cambridge Currencies, notes that the businesses with the cleanest FX outcomes over multi-year periods aren’t those with the smartest CFOs — they’re those with the most disciplined policies, executed consistently regardless of rate level. The discipline is more valuable than the analysis.
Frequently Asked Questions
What is an FX policy?
A documented framework setting out how a business measures, manages and reports its foreign exchange exposure. It typically covers governance (who owns decisions), exposure measurement, hedge ratios, approved instruments, counterparty rules, reporting cadence and exception handling.
When should a UK SME write its first FX policy?
Typical triggers: crossing £1m of annual FX exposure, hiring a CFO or finance director, or first time the board challenges the hedge ratio. Below £1m of exposure, ad-hoc execution can sometimes work; above it the absence of a policy starts to show in rate variance and audit trail.
What hedge ratio should a UK business use?
It depends on margin sensitivity. Common SME starting points: 60–80% of confirmed transactional exposure, 30–60% of 0–6 month forecast exposure, 10–30% of 6–12 month forecast, unhedged beyond 12 months. The right ratio for any specific business is a board-level decision tied to business risk tolerance.
Should our hedge ratio change based on the exchange rate level?
No — if it does, you’re trading rather than hedging. The policy applies regardless of rate level. If you want flexibility based on rate moves, write the triggers into the policy explicitly with defined thresholds.
What hedging instruments should the policy approve?
For most UK SMEs: spot transfers, forward contracts, limit orders and regular payment plans. Currency options and exotic structures usually aren’t justified for SMEs. Speculative positions (buying currency without an underlying commercial flow) should always be explicitly prohibited.
Do we need more than one FX provider?
Usually yes. A primary specialist broker handles routine activity at competitive rates with full forward and limit-order capability; a UK bank backup handles emergency execution if the primary provider has an outage. Concentration limits prevent over-exposure to any one counterparty.
How often should the FX policy be reviewed?
Monthly exposure reporting, quarterly board summary, annual full policy review. The annual review keeps the policy aligned with the business as it evolves — a policy written two years ago may not match current exposures, scale or risk tolerance.
Building or refreshing your business FX policy and want to make sure the framework, hedge ratios and counterparty arrangements are right? Speak to a Cambridge Currencies specialist by phone — we work with UK CFOs and finance directors to set up working policies that survive personnel changes and board scrutiny. Request a free quote today. All transfers are completed by phone with a dedicated specialist. We work exclusively with FCA-authorised payment partners.
This guide is for informational purposes only and does not constitute financial guidance. The right FX policy for any specific UK business depends on margin structure, sector exposure, scale and risk tolerance — always seek independent professional guidance for material treasury decisions.
