Natural Hedge
Short definition
A natural hedge shrinks an open position by matching cash, costs or debt in the same currency and tenor without derivatives. It is a product of invoicing, sourcing and borrowing policy.
Detailed explanation
USD revenue + USD inputs + USD debt shrinks the net USD gap. TL revenue + USD debt is not natural; it creates the gap. If tenors do not match, the natural hedge fails on cash timing.
Price pass-through is a partial natural hedge; contracts and competition cap it. If cost inflation and FX pass-through do not move together, economic exposure remains.
Why it matters for the CFO
When derivatives are expensive or restricted (covenant, collateral), natural matching is the first defence. A false “natural hedge” claim hides the need for derivatives.
How to read it
The natural-hedge ratio is measured from actual collection and payment currencies in a stress year, not from the budget. Basis (different pairs) breaks operational matching.
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Definitions are educational. They are not investment, credit or tax advice.