Generating 2015 FX budget assumptions is getting complicated. That’s because the wild FX rate swings over the last few months coincided with the budget efforts of publicly listed companies following a fiscal calendar. Now many of them to reconsider their hedging strategies.
At least that was the message conveyed by participants in a recent webinar survey by Chatham Financial. The February 5 webinar focused on volatility impacting markets including the FX, and a survey generating 167 responses found that 29 percent of the financial-executive participants said FX volatility has been a major point of discussion with their investors, board members and senior management. In addition, 55 percent of respondents said their companies have either changed their hedging strategies or are discussing changes.
The survey follows Chatham’s analysis 18 months ago of annual financial statements from more than 1000 publicly traded companies that found 75 percent acknowledged FX risk but only half sought to hedge it. Amol Dhargalkar, who heads up Chatham’s corporate practice, said some companies were hedging monetary assets and liabilities, in what typically is referred to as a balance-sheet hedging program, also sometimes referred to as transaction hedges.
A second category sought to hedge revenues and expenses further out than a quarter, in what Chatham refers to as cash-flow hedges. Although financial statements are ambiguous on the precise nature of the hedges, the derivatives typically aim to hedge projected transactions and sometimes can be interpreted as “translation” hedges, which seek to offset the impact of FX changes on a company’s consolidated financial statements.
As far as companies changing their hedging strategies, the webinar survey didn’t ask about the specific types of changes. Mr. Dhargalkar noted, however, that from Chatham’s experience dealing with hundreds of corporate customers, less than one third have a sophisticated and ongoing hedging program in place whose goals can be clearly articulated to investors, senior management, and the board of directors.
At the other end of the spectrum are companies that are instituting a program, perhaps because they have just expanded business internationally, management has changed, or the business has been restructured—any number or reasons. In the middle, Mr. Dhargalkar said, is the group “representing a significant portion of the overall market” that has an elementary policy in place but hasn’t updated it in some time.
“These volatile times have opened up questions that may have been answered by previous treasurers or other staff at some point, but the issues haven’t been addressed in a while,” Mr. Dhargalkar said, noting he was scheduled to talk to executives of a company that had used FX-related options and was considering forward contracts.
Mr. Dhargalkar said that hedging programs have been adopted by increasingly smaller companies in terms of sales in recent years, adding that Chatham sees 70 percent of companies with between $500 million and $1 billion in revenues using some type of cash-flow hedging program. The analysis 18 months ago also noted that of companies with between $5 billion and $20 billion in annual sales, and 85 percent of those supported cash-flow hedging programs.
“It’s a fair statement that the larger the company, the more likely it is to have multiple hedging programs and to look at its currency risk in a holistic manner,” Mr. Dhargalkar said. “However, even smaller companies are doing this today.”