Policy clause
"Hedge at least 75% of US dollar exposure": how to write it, test it and evidence it
A hedge-ratio floor requires currency forwards to offset most of the portfolio's dollar assets. It becomes testable once the policy names the hedge instruments, the exposure hedged and how a forward is measured. Acclimetry's currency hedge ratio divides the hedges' notional by the value of the dollar assets and bands the result.
At least 75% of the portfolio's US dollar exposure will be hedged to sterling.
hedge_ratioQuestions to settle before it can be tested
- Exposure to what: dollar-priced assets, or economic dollar exposure such as US revenues of UK companies? The ratio reads holdings priced in the currency.
- Hedge measure: a forward's market value is near zero, and its notional is the hedge. Acclimetry uses delta-adjusted notional, then notional, then market value, and says which.
- Over-hedging: is more than 100% allowed? A hard maximum catches a hedge that has become a position.
- Drift between rolls: assets move daily while hedges reset monthly, so a warning band avoids constant breaches.
As a testable rule
Currency hedge ratio template, currency USD, hedge class FX forwards: the forwards' absolute exposure over the absolute value of the other dollar holdings. Hard minimum 75%, warning minimum 78%; an optional hard maximum of 105% catches over-hedging. Both sides are in the base currency at the same valuation.
A testable wording
Forward currency contracts will hedge between 75% and 105% of the sterling value of the portfolio's US-dollar assets, measured at notional.
The currency hedge ratio page explains the measure; currency basis and hedges covers denomination and economic exposure.
Worked example
Forwards with a 3.08m notional hedge 77% of 4m of dollar assets: above the floor, inside the warning band.
Rule template:hedge_ratio currency: USDhedgeClassNames: FX forwards
Bounds: hard min 75% · warn min 78%
| Holding | Class | Currency | Market value | Notional |
|---|---|---|---|---|
| US equity fund | Equities | USD | 2,400,000 | – |
| US Treasury 4% 2030 | Government bonds | USD | 1,600,000 | – |
| Forward: sell USD, buy GBP, November 2026 | FX forwards | USD | 15,000 | 3,080,000 |
| UK equities | Equities | GBP | 3,000,000 | – |
| UK Treasury 3.25% 2033 | Government bonds | GBP | 1,985,000 | – |
| Group | Status | Value | Bounds | Headroom to the hard bound | Code |
|---|---|---|---|---|---|
| USD hedge ratio | Warning | 77% | ≥ 75% warning ≥ 78% | 2% -1% to warning | BELOW_WARNING_MINIMUM |
BELOW_WARNING_MINIMUM: The measured value has crossed the early-warning minimum but not the hard limit.
Largest contributors: USD hedge ratio → Forward: sell USD, buy GBP, November 2026 77%
Computed at build time by the Acclimetry rule engine (backend commit 8197063); the same code runs in the product.
What each monitoring run records
Each run stores the hedge ratio, its state, headroom and forwards, and how many hedges were measured at notional rather than market value. A book with no dollar assets reads not applicable, never compliant. A breach opens a case like any other limit.