A majority of corporates responding to a recently published Deloitte survey are challenged by a lack of visibility into foreign exchange (FX) exposures and reliable forecasts, as well as the manual nature of quantifying exposures—a finding treasury could potentially use to its advantage.
Deloitte says the “2016 Global Foreign Exchange Survey: Continued evolution” was designed in response to the FX-market volatility’s recent impact on business. The consultancy notes FX uncertainties continuing this year, including diverging interest rate policies, de-pegging of some currencies, and changes in global tax rules.
“The ability of corporations to manage currency risk effectively will therefore continue to be tested,” the survey report says. “Boards and CFOs need to be comfortable that currency-related value erosion is avoided and, where necessary, challenge their treasury teams to address some of the identified hurdles.”
The lack of FX exposure visibility and reliable forecasts was reported by 56% of survey respondents, followed by emerging market/restricted currency market volatility and manual exposure identification and capture processes, each cited by nearly half of respondents. Deloitte notes that the lack of visibility reflects the topic’s complexity, with 31% of respondents relying on three or more sources of data to identify the exposures, and another 28% using two sources.
“Companies therefore need to focus on achieving real-time integration of different systems, and data quality and consistency from the various sources, to drive visibility and reduce inaccuracy,” the report says, adding that half of respondents operate in more than 20 countries, increasing the complexity.
The survey also found that 37% of boards of directors do not receive sufficient information about FX exposures and risk management, and the report recommends that treasurers review their reports and discuss key FX risk measures in relation to wider financial and strategic measures. It also says boards should challenge their treasury teams over the limited use of natural hedging and netting within their organizations. Less than half of respondents reported natural management or netting of exposures across business entities, while under 60% reported matching costs and revenue in the same currency in the same entity.
“The question of course arises as to whether boards have the visibility to challenge this and ask key questions, such as why gross rather than net exposures are hedged with derivatives,” the survey report says.
The survey found only 48% of respondents measure FX impact on the income statement and 41% on gross margin or other profitability measures. Just over a fifth of respondents don’t measure FX’s impact on performance at all.
The survey covered several other areas, ranging from respondents’ hedging objectives, the primary hedging strategies by industry, and the use of technology to manage FX risk. On the technology front it found that 44% of respondents do not use a treasury management system (TMS) or a financial risk system to manage FX risk.
“For those who do, their main usage is process-driven, covering deal capture and operations,” the survey report says. “Other tasks such as exposure capture and analytics are often done outside the TMS environment.”
Manually collecting data to quantify FX risk is bound to slow the analysis process and reduce the reliability of forecasts necessary to hedge effectively. Niklas Bergentoft, director of treasury advisory services at Deloitte Advisory, said that can be the crux of treasury’s argument for top management and the board to approve funding more accurate and timely forecasting tools, so treasury can play a more effective strategic advisory role.
Part of that argument involves treasury explaining the impact of hedging in the context of common benchmarks such as earnings per share (EPS) and gross margin that are particularly relevant board members and upper management—hopefully generating more support.
“There’s a bit of a disconnect: Boards should expect more from treasury and challenge treasury teams more, but that needs to be balanced with the company investing more in the treasury function,” Mr. Bergentoft said.