Managing foreign currency risk is one of the top challenges for corporate treasurers at multinational organisations but what are some of the mistakes companies often make in FX hedging?
Hedging currency risk is a nuanced, complex task and just one of the many responsibilities vying for the treasurer's time and attention. It can take months to put a currency hedge in place and in the current climate, with political surprises increasing moves in foreign exchange rates, treasurers need to stay on their toes when it comes to mitigating currency exposures.
In the past 12 months, we've seen major volatility among the world's main currencies. The pound declined following the UK's 'Brexit' vote, the euro is moving towards parity with the US dollar, China's renminbi is weakening and the the Mexican peso took a dive after the Trump presidential victory. Further volatility is expected in 2017, with further elections in Europe, Brexit negotiations and uncertainty about the US's trade relationships with Mexico and China in particular. The only thing that's clear is that now is the time to make sure your FX risk management is top class. So what are some of the mistakes companies often make in FX hedging? Here are some suggestions of the pitfalls to avoid.
1. Don't try to second-guess the news
We know when to expect certain news events but when it comes to election results, interest rate hikes or the impact of political announcements (or tweets), predicting the impact on FX is far more difficult. The market can react to unexpected news in unexpected ways, as we have seen repeatedly over the past year. It can therefore be dangerous to take a position before a news announcement and it's far better to take a longer-term strategy (as described in this CTMfile article).
2. Don't pay too much
Always make sure you have information on a range of rates and fees so you don't get 'stuck in a rut' of paying a small group of relationship bankers. It's always worth shopping around if time allows. Hedging internally will also decrease FX hedging fees further and it's even better to look for the natural hedge in your company's operations and seek to mitigate risk that way.
3. Don't misinterpret your global balance sheet data
Cash flow forecasting is a challenge for companies with a global footprint and decentralised operations. If you don't have clear data on your global cash positions, you won't have visibility of your actual FX exposures, making it impossible to hedge accurately. Paying close attention to the data your financial officers around the world are providing, whether it's account or balance sheet, will give a clearer picture of the risks you're exposed to.
4. Don't rely on quarterly reporting
Try to analyse FX data as often as possible, not just once a quarter or even annually, as is the case for some companies. Staying up-to-date with the fluctuations in your own company's exposures and currency requirements will help to hedge where and when needed.
5. Don't forget the transactions
Companies need to be able to measure their FX exposures overall but, more than that, they need to hedge individual transactions – focusing on this can provide a more realistic picture of your hedging requirements, rather than trying to guess the direction of currency markets.
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