Should FX Exposure Always Be Hedged?

For a company with an exposure to currency risk, hedging with derivatives is one way to reduce or eliminate that risk. However, a risk manager at one bank argues that companies should not automatically hedge exchange rate risk. For example, if a U.S. company is going to receive euros at a future date, it will lose if the dollar weakens. If the company expects the dollar to strengthen, a good hedging strategy may not involve a hedge at the current exchange rate, but to allow a small risk in order to give the market time to move in the expected direction. While we are not endorsing or condemning the particular strategy used in the article, we definitely agree that hedging is not a one size fits all activity and should be fit to the particular company and situation.