As the pandemic continues to throw markets into confusion, forcing corporates to battle against unprecedented volatility, treasury functions have an opportunity, albeit uninvited, to prove their strategic value – especially in relation to FX risk management.
The FX Hedging Strategies for a Post-Covid-19 World survey, carried out jointly between Kantox and TMI, brings this opportunity into sharp focus. It casts light on the levels of preparedness to tackle FX risk among more than 150 respondents drawn from a broad range of sectors and business sizes.
The results indicate that while some have a fairly robust existing approach to FX risk, the world is changing faster than most of us ever expected – and some corporates are not yet well positioned to catch up. The good news is that FX risk management can be enhanced considerably. But first, let’s set the scene for progress with a look at some of the survey’s key findings and trends.
Asked about their FX hedging challenges during the past three months of the Covid-19, 68% cited exposure collection and monitoring as their biggest concern. This is a problem typically forced by a lack of system integrity and clearly defined processes, both issues amplified by the pandemic. When it comes to actual FX pain points experienced during the pandemic, 64% said increased volatility was the leading worry.
Some 66% base their cash flow hedging programmes on forecasts. With forecasting accuracy thrown into confusion by sudden revenue volatilities caused by lockdowns, the pandemic has found a weak point. Perhaps resulting from lack of process clarity or data accessibility (or both), 34% of respondents admitted to being over-hedged at some point. Companies seem to be suffering from a lack of confidence in the capacity of their current FX policy and hedging programmes to be effective in times of stress.
Indeed, the survey finds 52% of respondents describing their hedging programmes as either inadequate, partially adequate or non-defined. When anecdotal evidence reveals some policies offering little more advice than ‘do not speculate’, the lack of specificity around even risk tolerance makes the treasurer’s job unnecessarily challenging, even at the best of times.
It’s encouraging to see that 43% see current circumstances as the catalyst for review of their FX management objectives. Some 56% suggest even that FX risk management will increase in importance, post-pandemic.
However, with 81% seeing a future of more work and fewer resources, it was surprising that ‘only’ 56% of respondents are expecting an increase in their workload over the next six months. For those for whom this proves a harsh reality, automation technology can bridge the gap and even enable greater focus on value-adding tasks.
But with 53% of respondents citing lack of technology budget as a hindrance to effective treasury, a business case is needed for the strategic value of robust FX risk management. This should not just talk about reducing time spent on activities such as collecting and monitoring FX exposures, but also highlight the reduction of FX risks and costs faced by organisations in dealing with buyers and suppliers in these most volatile of times. A key starting point for stronger FX management is an effective hedging policy.
The kind of high-level FX hedging policy referred to above (‘do not speculate’) is of minimal use at any point in time. For any business subject to cross-currency transactions (including debt denominated in other currencies), taking time to develop a robust FX policy will help prevent emotionally driven decisions – or decisions not linked to corporate strategy and the way the business operates.
An intelligent FX hedging policy can enable a business to safely buy and sell in local currencies while safeguarding its margins. It also demonstrates good governance to investors and other stakeholders such as banks, ratings agencies and potential mergers and acquisitions (M&A) partners.
Every hedging policy needs to be built around the business and its current needs, not around how the market appears to be behaving. While detail-richness is important when prescribing the FX workflow, the document needs to be both usable and flexible. Usable because if it’s too detailed it becomes a burden, and flexible because it must allow for a rapid response to changing conditions, such as the digital expansion of the business into new territories.
Although by no means comprehensive, the following is a simple guide to FX policy creation:
Editor, Treasury Management International (TMI)