This article is provided by Alt 21 Limited, trading as Alt21, an FCA authorised payments and FX provider, and is intended for UK businesses considering FX hedging as part of their treasury activity. This article is presented as an interview with Pritesh Ruparel, CEO of Alt21, and reflects his personal views and experience working with Alt21’s clients, rather than independent market commentary or the views of Alt 21 Limited as a firm. All examples provided are illustrative only and not a current or guaranteed rate. Nothing in this article is a personal recommendation or regulated financial advice, and Alt 21 Limited does not provide investment advice. Please read the full disclaimer at the bottom of the page.
If you know about a currency exposure when it’s created, why couldn’t you manage the exchange rate at the same point?
Businesses often know about future cash flows well before the money moves, whether that’s a contract agreed in euros, an invoice raised in dollars or payroll that will need to be paid in pounds. Yet the FX exposure attached to those commitments is often managed separately and at a later stage.
Finance teams bring expected payments and receipts together, calculate their overall position and then decide what, if anything, to hedge.
Embedded hedging brings that process closer to the business activity creating the exposure, connecting currency management directly to existing financial workflows.
We sat down with Pritesh Ruparel, founder and CEO of Alt21, to explore how embedded hedging works and why he believes it could change the way businesses manage FX.
What is embedded hedging?
Embedded hedging connects FX management directly to the business activity creating a future currency exposure.
Rather than identifying the exposure later and managing it through a separate process, predetermined hedging rules can be applied when the underlying transaction occurs.
An invoice provides a straightforward example. Imagine a UK business agrees to receive €50,000 from a customer over the next year. Once that contract is agreed, the business already knows something important – it expects future euro receipts.
Traditionally, that exposure might eventually become one line among many in a finance team’s FX forecast.
The team could aggregate its expected receipts and payments, account for anything that offsets them, calculate its net position and then decide whether and how much to hedge.
Prit believes technology creates another possibility.
“If you knew that thing today, why not just protect it today in a way that you can kind of hedge and forget?”
This does not mean the position can be ignored once it is in place, since a hedge still carries obligations and risks that need to be reviewed, as covered later in this article.
In practice, the process needs considerably more nuance than simply hedging every transaction.
The business still needs to decide which exposures it wants to include, how much it wants to hedge and what parameters should apply. Hedging products also introduce their own costs, obligations and risks.
But once those decisions have been established, the execution can become part of the workflow creating the exposure rather than a separate job finance has to return to later.
That’s the basic idea behind embedded hedging.
What’s the difference between embedded hedging and automated FX hedging?
Embedded hedging and automated FX hedging both use technology to reduce manual work, but they start at different points in the process.
Automated FX hedging generally takes an exposure you’ve already identified and executes according to predetermined rules.
For example, if you expect to buy $10 million over ten months, you might set a schedule that automatically hedges a proportion of that exposure each month.
Embedded hedging moves further upstream by connecting the hedge to the business event that creates the exposure in the first place. Instead of finance identifying and aggregating the exposure before applying an automated strategy, the system can recognise it when a qualifying invoice, contract or other transaction occurs and apply the rules you’ve already established.
As Prit explains:
“That’s just an automated workflow. Embedded is literally at the point the transaction happens.”
So automation can be part of embedded hedging, but automating FX execution alone doesn’t necessarily make the process embedded.
What problems does embedded hedging solve?
For Prit, the case for embedded hedging starts with a simple problem:
FX hedging often sits too far away from the business activity creating the exposure.
Currency exposure can arise through everyday business activity, whether that’s agreeing a customer contract in another currency, raising an invoice, committing to overseas supplier costs or hiring employees who’ll be paid in another currency.
The information exists, but managing the resulting FX exposure often becomes a separate process.
Finance may need to bring expected payments and receipts together, account for exposures that offset one another, calculate its net position and decide how much it wants to hedge. As forecasts change, those calculations may need to be revisited.
Prit describes this as taking individual exposures and turning them into a larger “macro” view. A business might estimate that it needs to sell €500,000 every quarter, for example, and build its hedging programme around that overall figure.
That approach can work, particularly for established businesses with predictable cash flows and dedicated treasury resources. But it also creates work between the moment an exposure arises and the point at which it’s eventually managed.
Embedded hedging can shorten that distance by connecting predetermined hedging rules to the underlying business activity. Rather than waiting for individual exposures to be aggregated into a larger forecast before they can be managed, the process can begin when the underlying transaction occurs.
As Prit explains:
“The way people traditionally hedge is they take all these individual exposures and they create a macro exposure.”
Embedded hedging takes a different approach by connecting the individual exposure to the hedging process earlier. This can reduce the work involved in identifying, consolidating and repeatedly recalculating exposures as a separate part of the finance workflow.
What could embedded hedging look like in practice?
For embedded hedging to become useful, it needs to connect with the places where businesses already create future financial commitments.
That creates a wide range of potential applications.
Embedded hedging and invoicing
Almost every business invoices.
And when an invoice involves different currencies, it can create an identifiable future currency exposure.
Suppose a UK company invoices a European customer €100,000 with payment expected in 90 days.
The finance team already knows:
- The currency it expects to receive
- The amount
- The expected payment date
- The currency it ultimately needs for its own reporting or costs
Today, the invoice may be recorded in one system while the currency exposure is subsequently managed somewhere else.
Embedded hedging creates the possibility of connecting those processes.
As Prit explains:
“When an invoice is raised, if there’s a future FX risk, it gets covered.”
That doesn’t necessarily mean every foreign-currency invoice would automatically be hedged in full.
A finance team could decide that only certain currencies qualify, that it wants to hedge a particular proportion of eligible exposures or that a person needs to approve the transaction before anything is executed.
The important part is that the exposure doesn’t need to be manually rediscovered later.
Embedded hedging and international payroll
Payroll provides another potential use case for embedded hedging because businesses may have visibility over their currency requirements well before employees are paid.
Imagine an Irish business that earns primarily in euros but employs a large team in the UK. Every month, it needs pounds to pay those employees, and finance may already know much of that expected cost months in advance from employment contracts, salaries and payroll schedules.
Yet the amount ultimately paid in euros will still depend on the EUR/GBP exchange rate when the currency is exchanged.
Prit sees an opportunity to connect those two processes.
A business could decide what proportion of its expected payroll requirement it wants to hedge and over what period, then apply those parameters as part of its payroll process.
Payroll forecasts will naturally change as employees join or leave, salaries increase and hiring plans evolve, so the amount a business expects to need in another currency may change too.
Finance therefore still needs to consider how much of that forecast exposure it wants to commit to hedging based on the information available at the time.
Connecting the processes means currency management can begin when the future payroll requirement becomes known, rather than being treated as a separate task closer to the date employees are paid.
Which businesses could use embedded hedging?
Prit sees the potential applications as broad, particularly for businesses whose primary objective is managing currency exposure rather than actively generating returns from FX.
Keep in mind that embedded hedging won’t automatically suit every business or every exposure.
A company with uncertain cash flows may need more flexibility than one with highly predictable contracted revenue. Another may already have a sophisticated treasury function actively managing exposures across the business.
The usefulness of an embedded approach therefore depends on factors including:
- How predictable the underlying cash flows are
- Which currencies the business deals in
- The size and timing of its exposures
- Its existing hedging policy
- How much flexibility it needs if the underlying transaction changes
- The costs and obligations associated with the hedging products being used
Where embedded hedging becomes particularly interesting is for businesses that have identifiable future currency requirements but don’t want currency management to become a separate operational discipline.
Instead of building more processes around FX, the embedded hedging process can increasingly sit inside the financial activity the business already carries out.
Does embedded hedging take the decision away from finance?
No. This is one of the easiest misconceptions to make about embedded financial technology.
If a system can automatically recognise an exposure and execute a hedge, it can sound as though the algorithm is making the financial decision.
Prit sees the relationship differently.
“It’s executing systematically based on the rules you’ve set. It’s not making the decisions for you. You’re telling it what to do.”
Finance still establishes the FX policy.
For example, the team might decide:
- Which currencies it wants to include
- Which types of exposure qualify
- What percentage of an eligible exposure it wants to hedge
- How far into the future the programme should operate
- What costs or other parameters it will accept
- Whether transactions execute automatically or require approval
Once those parameters exist, technology can carry them out consistently.
Prit describes three broad questions finance needs to answer upfront:
“What’s the risk they want to take out? How much of it do they want to take out? And how much are they willing to pay for it?”
Those decisions can also be reviewed as the business changes.
Embedded hedging therefore doesn’t necessarily remove finance from currency management.
It can remove some of the repeated operational decisions that come after finance has already decided how it wants to manage a particular type of exposure.
An embedded hedging approach still requires careful decisions
One of the potential benefits of embedded hedging is that finance doesn’t have to make a fresh execution decision every time an exposure arises.
Without an established approach, it’s easy for short-term currency movements to influence when a business decides to hedge.
Sterling strengthens, and there may be a temptation to wait; the euro moves the following week, and suddenly hedging looks more attractive.
Decisions can gradually become influenced by a view of where the market might move next.
A systematic approach starts with the business deciding what it wants to achieve and setting parameters around which exposures to hedge, how much to cover and over what period. Those parameters can then guide execution as qualifying exposures arise.
As Prit explains:
“You have a decision to make at the start. You can review it through the lifecycle of your business as things change, but you should be fairly set and go.”
That doesn’t mean every hedge will look favourable in hindsight, nor does making the execution more systematic remove the risks and obligations associated with the underlying product.
A Forward Contract, for example, can establish an exchange rate for an agreed future transaction, which may help a business plan that cash flow with greater certainty.
If the market subsequently moves favourably, however, the business won’t benefit from that movement on the amount covered by the Forward. Depending on the arrangement, it may also need to provide collateral if the market moves against the position.
There is also the underlying cash flow to consider. If a payment or receipt changes or disappears after a Forward has been agreed, the business still has a contractual position that may need to be amended or closed, potentially at a cost.
Prit describes this as exchanging one type of exposure for another:
“You hedged the currency risk. You’ve added liquidity risk into your business.”
Embedding hedging into everyday finance workflows doesn’t remove those trade-offs. Finance still needs clear information about the product, pricing, obligations and potential outcomes before establishing the rules that will guide execution.
A systematic approach can reduce the need to revisit the same execution decision each time an exposure arises, while leaving the decisions about what to hedge, how much to hedge and which commitments the business is prepared to make with the finance team.
If you are unsure whether a Forward Contract or any other hedging product is right for your business, you should seek independent financial or professional advice before proceeding.
Could embedded hedging increase the adoption of FX hedging?
This is where Prit’s argument gets bigger than product design.
Businesses don’t necessarily avoid hedging because they have consciously decided they want currency exposure.
Sometimes the barriers are practical.
Someone needs to identify the exposure. Someone needs to calculate it. Someone needs to understand the available products. Someone needs to speak to a provider or log into another system. Someone needs to decide when to execute.
Every additional step gives the process another opportunity not to happen.
Embedded hedging could remove some of those steps by making currency management part of an existing workflow.
For Prit, the longer-term opportunity is to make hedging feel less like a separate task that finance has to return to and more like a natural part of the workflows it already uses.
“It should become an invisible process.”
By “invisible”, he doesn’t mean that the hedge, its costs or its obligations should be hidden. The finance team still establishes the parameters and needs visibility over what’s being executed.
What’s intended to recede into the background is the additional work of identifying an exposure, moving it into a separate process and executing against it manually.
That’s the opportunity Prit believes could ultimately increase hedging adoption.
“If we solve that, we will actually drive greater adoption of hedging.”
Whether that happens will depend on how embedded products are designed, how clearly businesses understand the commitments they’re making and whether the technology genuinely removes work rather than simply adding another interface.
But it creates a very different way of thinking about where hedging belongs.
Making hedging easier to access does not reduce the risks attached to the underlying products, which still need to be understood before any decision is made.
You may also be interested in reading Prit’s thoughts on why SMBs don’t hedge.
What does the future of embedded hedging look like?
Today, much of FX management happens after the commercial event that created the exposure.
The contract gets signed. The invoice gets raised. The employee gets hired.
Then finance works out what all of those decisions mean for currency. Embedded hedging creates the possibility of bringing those two moments closer together.
The long-term version isn’t necessarily a finance team constantly logging into a hedging platform and instructing individual transactions.
It’s finance establishing how the business wants certain currency exposures managed, then allowing technology to apply those decisions inside the workflows where those exposures arise.
Sometimes execution could be automatic. Other times the system might simply recognise the exposure and ask for approval.
As Prit explains:
“It could be fully embedded, systematic, or you have to approve every decision.”
The level of automation remains a choice, depending on how much oversight the finance team wants to retain. What changes with embedded hedging is the amount of work required between the business event creating the exposure and the resulting currency decision.
As financial technology becomes more closely connected to existing business workflows, some of that operational work can move into the background. Finance still makes the decisions and sets the parameters, but it doesn’t necessarily need another separate process to manage them.
If you’ve enjoyed this article and want to read more interviews with Prit, take a look at this one on AI FX hedging.
Manage the money you’re expecting, not only the money you hold
Currency exposure often begins long before money reaches your account.
It begins with the contracts you’ve signed, the invoices you’ve raised, the suppliers you’ve committed to and the people you’ve hired.
Embedded hedging could bring currency management closer to those decisions, allowing finance teams to establish their parameters upfront and apply them more systematically as qualifying exposures arise.
Alt21 is a multi-currency finance platform designed around both the money businesses hold today and the money they expect in the future, bringing payments, accounts and FX hedging into the same financial workflow.
Open an Alt21 account today and start planning beyond the next payment.
Applicants must pass Alt21’s onboarding process and accept our terms and conditions before becoming a client.
ALT21 Limited is authorised and regulated by the Financial Conduct Authority (FRN: 783837) and is a company registered in England and Wales (number 10723112). The registered address is 45 Eagle Street, London WC1R 4FS, United Kingdom. This article has been produced by ALT21 Limited for information purposes only. It does not constitute financial advice or an offer to sell or the solicitation of an offer to buy any products referenced. Hedging products are not suitable for every business. Before entering into any FX product, you should consider whether it is appropriate for your needs and circumstances. ALT21 Limited assumes no liability for errors, inaccuracies or omissions. Eligibility criteria and terms and conditions apply to all products and services offered by ALT21 Limited. Not all applications will be accepted.
