EuroFinance

In today’s fast-paced global economy, managing currency volatility is a critical priority for corporate treasurers. Exchange rate fluctuations can significantly impact profit margins, operational budgets, and long-term financial planning.

To navigate these challenges, treasurers must deploy a combination of natural and financial hedging strategies. At the EuroFinance International Treasury Management 2024 in Copenhagen, treasury leaders—from telecommunications to consumer goods —highlighted the strategies, challenges, and innovations shaping their approaches to managing currency exposures

The importance of natural strategies

Currency volatility poses a constant challenge for multinational corporations. Effective treasury management hinges on identifying and implementing the right combination of hedging techniques to protect profit margins, maintain financial stability, and support strategic objectives. From the foundational principles of natural hedging to the complexities of financial derivatives, the session revealed how adaptability and data-driven decision-making are at the core of successful strategies.

Hardeep Dhamu, treasury manager for APAC and EMEA at Extreme Reach, an American tech platform company that creates, distributes and optimises advertising and productions, emphasised the role of natural hedging, “natural hedging begins with aligning receivables and payables in the same currency,” he explained. He highlighted the necessity of robust data to evaluate the effectiveness of natural hedging. “Run reports to measure exposures after applying natural strategies. Whether it’s a 13-week forecast or a six-month outlook, accurate data is the starting point,” he stressed. He added, “When natural hedging proves insufficient, financial instruments like forwards and swaps become indispensable tools.”

Tailoring financial instruments to business needs

When natural hedging isn’t enough, companies turn to financial instruments like forwards, options, and swaps. Dimitrios Siokis, group treasurer at Coca-Cola Hellenic Bottling Company outlined the key factors guiding the selection of derivatives: “The cost of hedging, the accounting treatment and the payout profiles are our primary considerations.” Siokis emphasised that these considerations are critical for aligning hedging strategies with a company’s broader financial goals. “For instance, swaps might be ideal for managing risks under low volatility periods, while options offer flexibility during periods of uncertainty,” he explained.

Philip Maton, VP treasury at Liberty Global, a telecommunications company, expanded on this point, discussing Liberty Global’s approach to managing $40-$50 billion in debt. “We rely on advanced analytics and real-time reporting to ensure our hedging strategies remain effective,” he stated.” These derivatives play a critical role in protecting our businesses.”

Data accuracy and visibility emerged as recurring themes throughout the session. Maton and Siokis highlighted the growing role of technology in treasury management. “Advanced tools not only improve data visibility and as such drive optimal hedging decisions but also enable automation of reporting and analytics, which are critical for managing complex exposures,” said Maton.

Weighing the cost-benefit of hedging

Dhamu emphasised the importance of assessing the cost-benefit dynamics of hedging, explaining how Extreme Reach ensures natural hedging opportunities are fully explored before incorporating financial instruments. “The cost of hedging must align with our risk appetite and strategic goals,” he said.

Maton highlighted that the cost discipline is critical when managing large-scale exposures. “Ultimately, the decision to hedge—or not—depends on a thorough understanding of the business’s unique risk profile and the potential impact of currency fluctuations,” he explained.

Siokis emphasised the dynamic nature of hedging strategies, particularly in the face of fluctuating market conditions. “Hedging is not a one-size-fits-all approach. It evolves with the business and market context,” he said.

Building a resilient hedging framework

The speakers echoed the best practices for building a resilient hedging framework. Key takeaways included:

• Data-driven decision-making: “Accurate exposure measurement and forecasting are critical,” said Siokis.
• Strategic alignment: “Ensuring treasury strategies align with overarching corporate goals is paramount,” added Maton.

In an increasingly unpredictable economic landscape, the combination of derivatives, data, and strategic decision-making is reshaping how treasury teams navigate FX risk. By leveraging advanced analytics, robust forecasting tools, and tailored financial instruments, companies can create resilient frameworks that protect their bottom line while driving financial stability.

As experts aptly noted, a resilient hedging framework is not static; it evolves with the business and the markets we operate in. This adaptability, coupled with a data-driven approach and the judicious use of derivatives, empowers treasurers to mitigate risks and optimise costs. Ultimately, it’s the ability to align hedging strategies with broader business goals and market realities that distinguishes effective treasury management. As global markets remain volatile, treasurers must continue making informed decisions, using the power of data and financial tools to safeguard their organisations’ financial futures.