November 03, 2011
New Approaches to FX Risk Management
Redefining goals and purpose of hedging programs
At the winter 2011 FX Summit, convening both FXMPG1 and 2, members explored risk management strategies and concerns, in light of the high cost of protecting against commodity and currency risk. Among the topics discussed:
1) Hedging with Options. A panel discussed how to justify a hedge-premium budget and how dynamic to be in the use of options.
Key Takeaway: If there’s a reliable forecast, lock it in. If not, choose flexible instruments, e.g., options when points are against you or layered-in forward hedges as forecast certainty increases or points are in your favor.
2) Measuring FX Risk Management Value-Add and Performance. Two peer-group members gave presentations outlining their companies’ contrasting approaches to measuring risk.
Key Takeaway: At one company, a risk-reduction credit metric encourages earlier planning; at the other, performance is measured largely on how well earnings volatility is mitigated.
3) Commodity Hedging. Commodity risk is a growing concern in the groups.
Key Takeways: Because it’s difficult to qualify for hedge accounting, many are frustrated with the available options for hedging this risk.
4) Systems Review. Member shared their systems uses and preferences..
Key Takeaway: For better control, most companies prefer doing their own upgrades and hosting their own systems.
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