By: Alec Hollis & Michael Oravetz | Credit Union BusinessÂ
Hedging programs exist in various forms and in a wide array of industries. At its most elementary level, hedging is the action of adjusting, reducing, or mitigating the adverse impact of potential market fluctuations. For many credit unions, hedging is a risk management decision, used to manage the relationship between profitability and risk. In this article, we will dive into reasons many institutions undertake hedging programs and identify the more granular points of hedging.
Reasons to Hedge
Hedging is generally part of a credit unionâ€™s risk governance. The evolving regulatory and financial landscapes present a challenge for credit unions going forward. Important to ongoing safety and soundness is ensuring that risk is identified, and that policies, procedures, and mechanisms are in place to manage the dynamic risk profile of the institution. This is the essence of risk management. If a credit union decides not to hedge, this decision should still be made within a risk management framework after risk has been identified and assessed; not because of a lack in proper risk management.