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Sharing Trade Secrets: Effective FX Risk Management in 2020 Executives are increasingly looking to the treasurer to limit the negative effects of FX risk on the business. How, then, can treasurers revamp their hedging approaches in 2020 to help meet these goals and add value to the business?

 Sharing Trade Secrets: Effective FX Risk Management in 2020

Sharing Trade Secrets: Effective FX Risk Management in 2020

By Eleanor Hill, Editor


As the C-suite continues to seek to understand the potential impact of foreign exchange (FX) volatility on earnings, executives are increasingly looking to the treasurer to limit the negative effects of FX risk on the business. How, then, can treasurers revamp their hedging approaches in 2020 to help meet these goals and add value to the business?


Managing FX risk remains one of treasurers’ highest priorities. Although markets are not necessarily unusually volatile at present, treasurers need to remain aware of ongoing geopolitical uncertainty. Many treasurers must also manage exposure to a wider range of currencies as their international growth continues.

As outlined in the 2019-2020 Journeys to Treasury report produced by BNP Paribas, the EACT, PwC and SAP, these challenges are all too familiar to Jeff Hawkins, Group Treasurer of Fisher & Paykel Healthcare (F&P). Headquartered in New Zealand, F&P specialises in respiratory and acute care as well as the treatment of obstructive sleep apnoea – and sells into more than 120 countries worldwide. With 99% of sales made internationally, managing foreign exchange (FX) risk is a major treasury priority.

 

Top tips for FX hedging

  1. Treasury Policy. “The FX hedging strategy should be part of the company’s treasury policy to avoid any unauthorised or speculative transactions, and for better reporting and explanation of treasury actions to the CFO, Board and external stakeholders [e.g. shareholders and financial authorities],” says Jan Dirk van Beusekom, Head of Strategic Engagement, Cash Management & Trade Solutions, BNP Paribas.
  2. Hedging Horizons. “Determine what type of business you are, and depending on the nature of your business, decide whether short-, medium- or long-term hedging is most appropriate. Then build in flexibility to manage ‘outliers’ or particularly complex or volatile currencies,” notes Sebastian di Paola, Partner, PwC Treasury and Trading services.
  3. Board Communication. “Talk to the CEO and Board regularly to ensure that they fully understand the policy and its execution, and ensure that there is sufficient flexibility to manage through a crisis. If a problem has to go to the CFO to approve a solution, it is probably too late,” cautions Benoit Rousseau, Group Treasurer, Fromageries Bel. Di Paola adds: “The Board needs to understand that treasury is not taking away the ultimate economic risk, for which the Board remains responsible.” 
  4. What-if Scenarios. “Many companies still do not know what the impact on the business would be in the event of, for example, a currency devaluation. You first need a really solid handle on your exposures, and can then review your systems and reporting to provide better scenario analysis to help define business strategy. Treasurers need to be able to respond to questions from the Board on what would happen to consolidated results if certain currency moves occur. What and how to hedge comes second to a proper analysis of exposures,” says Di Paola.
  5. Hedging Decisions. “Treasury departments are typically small with constraints on resourcing. Decide on where you add the most value, and what hedging activities could be automated or outsourced. Then look at how you build scale and manage changes to the business,” observes Jose-Manuel Franco, Head of Foreign Exchange, EMEA Transaction Banking, BNP Paribas.

 

 

Since 2001 Hawkins and his team have worked closely with PwC to develop a highly effective FX risk management policy and approach, incorporating sophisticated financial modelling. One of the major FX challenges the company faces is the volatility of the NZD against other currencies such as the USD appreciating from as low as USD$0.3800 to as high as USD$0.8800, and typically moving well in excess of a 15% annual average range.

To mitigate the effects of this volatility, F&P has taken a detailed and strategic approach to FX risk management. This includes periodically hedging FX out to five years, which is significantly longer than other companies in most cases. “To achieve this, we have developed a robust treasury policy framework, supported with a sophisticated financial stress testing modelling tool to help identify and evaluate hedging alternatives. Proactive ongoing management is another cornerstone of our approach,” says Hawkins.

Alongside the policy, which covers short- to medium-term hedging (up to two years) and longer-term hedging (two to five years), F&P has also revamped its systems infrastructure. “Any effective approach to hedging relies on robust and reliable exposure information, and the ability to execute and manage hedging instruments accurately and efficiently. We have implemented a new sales forecasting solution, which provides us with a robust 12-month rolling sales and cash flow forecast. We also have a dedicated treasury and risk management system, and purpose-built spreadsheets for certain specialist calculations,” Hawkins notes.

Another tip Hawkins offers to those looking to keep a firmer handle on FX risk in the future is to manage expectations by consulting with, and seeking consensus from, the senior management team and Board. Additional FX reporting can also help to build confidence with the C-suite, he believes. “Managing external expectations has also been very important. We provide complete visibility over our FX gains and losses, and the effect of our hedging activities. For example, we provide our annual conversion rate in our financial statements, which is unusual, but gives investors greater confidence.”

 

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