How to Turn Legacy FX Hedges into Opportunities: Secondary Risk Management in Action

As we move through 2025, many companies are facing a common challenge: legacy FX hedges that no longer work in their favour.

At the start of this year, a typical strategy employed by many European importers was to hedge their USD exposure by selling EUR and buying USD forward. This made sense given the strengthening of the USD during H2 2024, which saw EURUSD trend down from 1.12 towards 1.02.

Since then, however, EURUSD has surged from 1.02 to 1.17, with the forward curve pointing to 1.19 by year-end — leaving many portfolios burdened with legacy trades at unattractive rates and deep mark-to-market losses.

But this isn’t the end of the road — it’s an opportunity.

By leveraging future hedging rounds, companies can restructure underperforming positions. Strategies like "extend and blend" allow you to smooth out unfavourable rates by combining old and new tenors. 

These rates can be further enhanced by including conditional features like knockouts to cheapen structures or by adding leverage, or penalty/resets to unlock even more value.

This is the essence of secondary risk management: actively managing and optimising existing hedges, rather than just focusing on the initial trades (primary risk management).

In today’s volatile FX landscape, mastering both is key to protecting — and enhancing — value.

20250703 - Secondary Risk Management - Extend and Blend.pdf

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