By Anne Friberg
Global growth and dollar strength highlight the impact of FX and the importance of a well-thought-out financial risk-management approach.
Multinational companies are facing stiff headwinds when it comes to internationally growth, whether they’ve been around the block a few times or are relatively new on the global arena. A panel discussion at the EuroFinance conference in March will seek to aid FX managers as they deal with these headwinds.
Anne Friberg, The NeuGroup’s facilitator of two peer groups for multinational FX risk managers, will return to the EuroFinance conference on “Managing Rapid International Growth” in San Francisco to lead the panel discussion, entitled “The perpetual headaches of hedging.” And What are some of the challenges and solutions the panel will seek to cover?
Treasuries whose firms push into international markets are faced with many challenges, including just keeping up with the demands of supporting an expanding business with bank accounts, payments, collections and other process-related tasks that increase with scale. But in a currency-market environment, which after many years of relative stability has returned to high volatility driven by increasing interest-rate differentials, economic instability and political uncertainty, to name a few factors, FX is the most obvious challenge to manifest itself, and some companies are better prepared to deal with this than others.
What are some of the reasons?
- Plenty of natural offsets in the business—or not: A business by its nature and geography may benefit from a lot of natural offsets with assets and liabilities in matching currencies. This reduces the net exposures that need to be managed. However, many other companies do not have these advantages. Particularly firms with concentrated costs (e.g., personnel, manufacturing) and dispersed revenues may experience serious mismatches that need to be handled by treasury, for example via hedging or borrowing in a currency that offsets revenues. The latter may be difficult for a company with a short track record.
- Existence or maturity of a hedge program: Younger and/or high-growth companies may be particularly challenged to deal with market volatility. Why? In addition to fewer reserves and a less-firm footing in the competitive landscape, they may have a less mature hedging program in place, maybe even one that does not yet have an established risk-management policy or defined objectives and therefore has not begun to routinely protect against FX fluctuations in a consistent way. If so, earnings volatility from FX fluctuations will soon show up on the financial statements, potentially spooking investors.
- Solid risk management frameworks: Hedge policies need to be robust enough to provide risk mitigation no matter in which direction currencies move, and in accordance with each company’s risk tolerance and ability to absorb losses, FX-related cash outflows or both.
Whether a program performs equally well in “up or down” markets depends on the chosen level of hedge coverage, choice of instrument and the flexibility of the policy to permit a range of hedge tenors, ratios and instrument choice based on factors that can be observed. This may, for example, promote the development of a decision tree for hedge actions, with more or less leeway for any “view taking” on future rates and market conditions.
- The team and its performance metrics: The more flexibility in a hedge program, the more important that the team in charge brings experience, market understanding and discipline to the table. Absent that, a more rigorously applied systematic approach may generate more steady results. The team also needs to be able to clearly link its goals to the key performance indicators (KPIs) they are benchmarked against. The board of directors, in turn, should understand what the program can and cannot do under its design and sign off on the FX objectives and metrics.
These and other considerations will be explored further when the panelists get together for the March 10 discussion (the EuroFinance conference itself runs March 9-10). Joining Ms. Friberg will be two NeuGroup members, Christian Bauwens, treasurer at Flextronics and Matt Post, director of treasury at QUALCOMM; also a panelist will be Scott Murcray, VP Finance Nanometrics and hedge accounting expert Helen Kane from HedgeTrackers. A summary of the panel conversation will be featured in a future issue of iTreasurer.