Most professionals in finance and treasury management have heard the phrase, “You get what you measure.” Now more than ever, having clear, well-structured performance metrics is essential for a successful cash flow hedging program.
In 2025, the landscape of foreign exchange (FX) risk management continues to evolve, with new data-driven approaches shaping the way companies assess the success of their hedging strategies. According to Gartner, 58% of finance functions are now using AI in some capacity, up 21 percentage points from the prior year.
Why measuring FX risk matters
Shareholders consistently evaluate company performance through earnings growth, revenue targets, and expense control. Given the increasing international exposure of businesses, FX volatility can significantly impact these metrics. However, FX impacts are often misunderstood both inside and outside the company, leading to increased financial risk.
Companies with global operations typically employ cash flow hedges (FAS 133/ASC 815) and/or balance sheet hedges (FAS 52/ASC 830) to mitigate currency risk. While balance sheet hedges primarily focus on short-term foreign currency exposure, cash flow hedges address forecasted revenues and expenses over a set period.
As these impacts appear on income statements, they require broader corporate awareness, reaching beyond treasury teams to finance leaders, business unit heads, and investors.
The pitfalls of a passive approach
Some companies opt for a passive hedging approach, arguing that FX hedging is a long-term, zero-sum game and prefer to report earnings in “constant currency” terms. While this method provides investors with some visibility into core financial performance, it fails to reduce actual earnings volatility.
High earnings volatility increases a company’s stock beta, leading to higher perceived risk and lower valuation multiples. Investors are not compensated for taking on additional FX risk, making it imperative for companies to implement well-structured hedging programs to protect their financial position.
Best practices for measuring cash flow hedging success
1. Set clear objectives and performance metrics
An effective cash flow hedging strategy starts with well-defined objectives. In 2025, companies are focusing on:
- Planning/budget rates: Determining the correct benchmark rates for the company plan is crucial and often done incorrectly.
- Forecast accuracy: Measuring deviations between forecasted and actual exposures. In 2024, 93% of treasurers admitted that inaccurate FX forecasts led directly to avoidable financial losses, such as unnecessary borrowing or cash shortfalls.
- Risk reduction: Assessing the decrease in earnings volatility due to hedging.
Using these KPIs, companies can quantify how well their hedging programs align with business objectives.
2. Adopt a layered hedging approach
A common mistake in FX hedging is the “set it and forget it” approach. Many companies hedge their entire annual forecast exposure at a single point in time, locking in rates that may not reflect future market conditions. This creates “stair-step” FX rate impacts from one year to the next, leading to abrupt earnings fluctuations.
A layered hedging approach helps smooth out FX impacts by executing hedges gradually over time, aligning more closely with market trends. This method ensures companies don’t overreact to short-term FX fluctuations while maintaining long-term stability.
3. Enhance collaboration between treasury and FP&A
For a cash flow hedging program to be effective, treasury teams must work closely with financial planning and analysis (FP&A) to integrate updated FX assumptions into financial models. Within corporate finance functions, treasury teams are catching up to their peers in FP&A and accounting: 80% of leading multinational corporations are using AI-driven forecasting tools to improve FX scenario planning and real-time decision-making.
By maintaining a rolling set of updated FX planning rates, companies can:
- Improve financial predictability.
- Reduce deviations between planned and actual earnings.
- Ensure business units understand the impact of FX risk management.
4. Utilize advanced technology and analytics
Emerging technologies, including AI-powered analytics and automated hedging platforms, have become indispensable in managing FX risk. A KPMG global survey found that 62% of companies are now using AI to a “moderate or large degree” in their finance operations.
Key tools in 2025 include:
- Machine learning models to refine hedging decisions.
- Automated dashboards to provide real-time risk assessment.
- Blockchain-based FX contracts for enhanced transaction security and transparency.
5. Implement robust performance dashboards
A comprehensive FX risk dashboard helps track key performance indicators and measure hedge effectiveness.
For example, a dashboard tracking Canadian dollar revenue might break down:
- Revenue at planning rates vs. actual realized revenue.
- Volume-driven vs. rate-driven FX impacts.
- Total income statement impact in a “pennies-per-share” format for investor clarity.
The true mark of a modern hedging program
A successful cash flow hedging program requires more than just executing trades—it demands continuous measurement, strategic adjustments, and a commitment to financial discipline.
By implementing clear performance metrics, embracing technology, and fostering collaboration between treasury and FP&A, companies can minimize FX risk while maintaining financial stability.
As 2025 unfolds, organizations that actively manage FX risk and adapt to evolving market conditions will be better positioned to achieve sustainable growth and deliver consistent results to investors.
Looking to level up your hedging strategy? Get the full breakdown in our white paper: How to Measure Success in Your Cash Flow Hedging Program.