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FX volatility catches corporates unprepared

FX volatility during the past year has put increased pressure on corporate hedging programmes, according to a survey by Wells Fargo.

The 2016 Risk Management Practices Survey notes that the effect of FX on revenues is frequently mentioned in company quarterly earnings reports.

More than half of the respondents (55%) said that FX was now a greater concern for them. They indicated that they had taken the following courses of action:

  • 47% increased the amount of their exposures hedged
  • 29% developed or revised their FX risk management policies
  • 18% extended their hedge horizons
  • 13% changed the mix of hedging instruments used

Lack of expertise and resources is bar to effective FX hedging

However, 36% of companies said they have no formal policy to address FX risks and only 17% measure potential FX risk. More than half (53%) of all companies said their biggest obstacle to establishing FX risk management best practices was deciding when to hedge and choosing the right strategy. This suggests that many corporates lack expertise and resources to effectively manage an FX hedging programme.

The exposures hedged by the survey's respondents were as follow:

  • 76% of companies hedge foreign currency balance sheet positions
  • 63% of companies hedge forecasted transactions
  • 10% of companies hedge their net investment risk
  • 15% of companies hedge earnings translation risk

The survey also found that 85% of companies manage risk on a centralised basis. Moreover, 40% have a hedge horizon for forecasted exposures up to 12 months but 42% hedge to longer maturities.

2016 Risk Management Practices Survey Infographic

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