The Swiss central bank’s decision to get rid of its cap on the exchange rate sent shockwaves through the markets, possibly sending several companies into insolvency. For corporates, it’s been more of an exercise in checking to make sure the risk program is shipshape and adding to the list of volatile currencies they must keep tack of.
And it’s a growing list, including the yen, the euro, the Canadian and Australian dollars – due to the recent oil price plunge, the Russian ruble and Brazil’s real, which the government has been trying to weaken. But in terms of corporate impact, it may be negligible. And in fact the biggest challenge may come from nervous boards wondering if the company has any exposure.
So with this latest currency event, treasurers might want to take stock of their programs, says Amol Dhargalkar, a managing director and the leader of Chatham Financial’s corporates team. Now is a good time to reassess how the company “thinks about approaching its risk management program,” Mr. Dhargalkar says. “Is it something that’s really robust and is prepared for these types of events?”
But for the most part, Mr. Dhargalkar says treasurers are likely on top of this type of currency shock. What’s perhaps more of an issue is that others in the company—senior management or the Board—are not as aware of the impact. They see the news on the front page of the New York Times or the Wall Street Journal so might think that there is something the company should be doing.
That’s when treasury needs “to make sure that he or she is well ahead of the board on these topics,” Mr. Dhargalkar says. He says treasurers need to have the plan top of mind when the call comes for an update. Then, “you can pull out the plan and say, ‘just a reminder, this is our program, this is what we’re doing, this is what we’re trying to achieve and here are times when it will work well, here are times when it won’t work, but the cost of trying of doing anything more than this is X and we’ve determined that this event isn’t worth paying that cost.”
Meanwhile, treasurers should also take a more macro view of what’s happening. According to a note to investors from Brown Brothers Harriman, the SNB’s decision to abandon the cap “has been linked by many observers to the ECB’s possible decision next week to buy sovereign bonds” and noted that “banks, electronic platforms and the like are making contingency plans in case Greece leaves EMU and reintroduces its own national currency.” Was this just one piece of the Jenga puzzle?