Natural hedge

An offset arising from a company's own operations, such as costs or debt in the same currency as revenue, so an exchange rate move affects both sides and they largely cancel.

Where you will meet it

Natural hedge appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Analyse the possible impact of currency movements on results, given the countries where a company operates
  CFA Level II · Financial Statement Analysis

  “The trap is ignoring the direction of the natural hedge between revenue and cost currencies.”

• Explain how currency movements affect asset allocation and planning, and set out techniques for limiting currency risk
  CFA Level III · Private Wealth Pathway

  “Global families may spend in several currencies, and the plan should match assets to those spending needs, which is a natural hedge.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with N · Glossary