How are you managing foreign
exchange risk? (cont’d)
Managing Foreign Currency Risk
8.13
iring an external consultant to
H
help manage risk.
8.00
6.87
Since most companies are clearly
not doing this, it may present an
interesting opportunity that should
be more fully explored, as the right
adviser can offer plenty of value.
6.72
Risk not managed.
Ask yourself, “why not?”
Natural hedges involve incurring
expenses in a country and paying them
in the local currency, so payments are
not impacted by foreign exchange risk.
When it comes to forward currency
contracts versus foreign currency
options, however, organizations must
make decisions based on corporate
risk tolerance levels and whether
they can identify, and be happy with
achieving, a specific margin.
Time period being hedged
Th i s re l a te s b a c k to c a s h f l ow
m a n a g e m e n t a n d t h e n e e d to
match the timing of payments with
their hedging terms – for example,
what foreign currencies are due in
each period and which period is
best? Remember, however, that the
majority’s preference for a six-month
to one-year position (57%) versus a
three- to six-month position (20%)
or a greater than one-year position
(13%) provides a comparative peer
benchmark rather than a strong best
practice.
Dollar amount being
hedged
With respect to the dollar amount
being hedged, most survey
respondents had a preference for
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4.28
2.83
2.47
Hedging strategy in place to manage risk
against future changes in foreign currency
Revise vendor and/or customer agreements to
renegotiate pricing and rebates
Accept lower margins on products sold
5.51
Open bank account in foreign currency to minimize
transaction differences
5.45
Renegotiate invoice payment terms with overseas
vendors/customers – pay in local currency
4.74
Hedging strategies
Adjust product pricing higher in the
market place
Choose to buy local
Renegotiate lending agreements to prioritize local currency
loans over foreign currency lending
Hire an external consultant to help manage risk
Risk not managed
Options ranked on a 10-point scale
hedges within $1 million to $250
million (67%) compared to under $1
million (17%) or over $250 million
(16%). The predominance of the
$1 million to $250 million amount
provides an interesting benchmark,
and is likely a function of corporate
payment schedules.
Objectives when managing
foreign currency risk
exposure
Responses here suggested that a
majority (75%) are managing foreign
currency exposures to minimize
the impact of the foreign exchange
rate changes on profit margins,
representing a true risk mitigation
strategy and not a speculative one.
Approximately 20% of the companies
sur veyed are managing foreign
exchange risk exposure to assist with
cash management and to increase the
predictably of future cash flows. Given
I N D U S T R Y U P D AT E
this focus, companies should, when
selecting a hedging strategy, be sure
to consider their risk tolerance level
carefully.
They should be particularly cautious of
possible mismatches between the cost
of producing a product and its price
in foreign countries. If you’re selling
to the US and have US inputs then
you have a natural hedge in place. If,
however, you have inputs purchased
in US dollars but you’re selling in the
European Union or other international
markets, you need to manage foreign
exchange risk carefully.
Given the range of foreign exchange
hedging strategies out there – foreign
exchange forward contracts, foreign
currency options, and other financial
instruments – it ’s impor tant to
consider what options are available
and what impacts they could have on
your financial results.