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Effective strategies for managing currency exposure

The fascinating presentation by Bob Elliot, Assistant Treasurer Global Cash Management, Eaton Corporation and Cindy Krause, Treasury Advisor, KeyBank entitled 'From Data Point to Decision: Effective Strategies for Managing Currency Exposur', contained clear descriptions of the objectives, processes and measurement in managing currency exposure, and some useful little case studies.

The classification of the types of FX risk was a good example of the clarity of their analysis:

Source & Copyright©2012 - Eaton Corporation

Eaton's main strategic objectives in managing currency exposure are to buffer the operating profitability by anticipatory hedges, minimise cash flow risk and leverage next investment hedges. While their earnings objectives are to minimise reported FX gains/loss, and ensure the group achieve profitability targets. (P&L translation risk is not managed.)

Eaton only hedge five key strategic currency pairs.

Setting hedging policy
In Eaton Corporation, there is a Hedging Committee which set policy and hedging limits for the strategic currency pairs. The committee also set matrices as to how much of the future exposure in these currency pairs is hedged, see table.

Eaton Corporation's hedging limits matrix per strategic currency pair


Source & Copyright©2012 - Eaton Corporation


This is a great example of how hedging policy should be set and hedging managed. 

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