Before you do anything else, figure out your risk appetite.
Before you compare products or providers, you need to decide how much exchange rate uncertainty is your business willing to live with? For example, Wise Risk provides three pre-built strategies, ranging from fully protected to intentionally exposed to market volatility.
Most conversations about currency risk jump straight to instruments. Forward or option, bank or broker, hedge now or wait. Those questions matter, but they all sit downstream from one question that usually goes unasked: how much exchange rate uncertainty can this business comfortably carry? Answer that first, and the downstream decisions stop feeling arbitrary.
What does risk appetite actually mean here?
It’s the amount of variability in your currency costs that you are prepared to live with in exchange for the chance of a better financial outcome. A business running tight, fixed-price contracts may want almost none, because one swing against them eats into a margin they cannot replace. Another business with more headroom and awareness of the market may accept more movement in return for the upside when the rate goes their way. Neither is correct in the abstract. It really depends on the company.
Why decide this before choosing a tool?
Because the tool is the expression of the appetite, not the other way around. If you know you want near-total certainty, that points one way. If you’re willing to leave part of your exposure open on purpose, it points another direction. Choosing an instrument before you’ve settled the appetite is how businesses end up over-hedged, under-hedged, or paying for protection they didn’t actually want.
How does Wise Risk frame the choice?
Wise Risk, our automatic hedging tool, has three different strategies which we believe are great examples of how you can think about this.
- A disciplined strategy is cautious or protective, where you would hedge around 90% of identified exposure because your business wants maximum budget certainty.
- A balanced strategy covers roughly 75%, leaving a quarter open to the market, which is great if you want some benefit from favorable moves.
- Our opportunity strategy hedges only 50% of your exposure, which is good when teams are actively watching the market and can act on unfavourable movements.
While we think these examples are helpful in contextualising how you can think about this problem, this is not investment advice.
Where should the number actually come from?
From the business, not the market. Your contract structure, your margins, and how much volatility your cash flow can absorb are what set it. The market’s job is to be uncertain. Yours is to decide how much of that uncertainty you’re willing to take on.