Managing the unexpected: the power of consistency and preparedness in FX hedging
When rates or volatilities spike, treasurers must carefully consider their response: stick with the existing hedge program, reset it or even pull it? Should you pay up to lock in certainty, or wait for conditions to normalise?
In an increasingly global economy, multinational corporations are continually grappling with fluctuating foreign exchange (FX) markets. One of the primary weapons in their arsenal is corporate FX hedging. Yet, the sheer complexity of these strategies and the myriad factors influencing them can often cause treasurers to misunderstand their significance. This was the central topic discussed at the 2023 EuroFinance Global Treasury Americas Miami, featuring treasury executives from the interactive entertainment and gaming company, Activision Blizzard, American household products company, Tupperware Brands, and the cybersecurity technology firm, Crowdstrike.
The centrality of consistent hedging
Emphasising the importance of a “consistent message,” Trent Handler, senior treasury manager at Activision Blizzard, started by focusing on the value of creating robust hedging strategies that can weather unexpected challenges.
From this perspective, consistency serves as the foundational pillar in corporate hedging. It provides a valuable framework, a steady hand on the wheel, guiding businesses through the twists and turns of volatile markets. By adhering to a consistent strategy, corporations can effectively manage risk, ensuring their financial stability.
However, consistency alone does not fully capture the picture. The discussion also brought to light the necessity of leveraging a variety of resources in developing FX forecasts. Treasury teams often utilise third-party information from partner banks and suppliers to shape their unique hedging approach. Still, this must be balanced carefully to avoid the risky game of speculation.
Patrick Baumann, treasurer at Tupperware Brands, warned against turning to speculation, stating emphatically, “First of all, you should not speculate, right? So, there’s no tolerance to speculate.” He emphasised the importance of basing decisions on recognized exposure from a cash flow standpoint rather than personal opinions on currency exchange rates.
Further illustrating the complexity of corporate hedging, Baumann drew attention to the dynamic nature of these strategies. Both balance sheet and anticipated cash flow factors play vital roles in shaping a company’s approach to hedging.
“If it’s a fair value hedge, it’s your balance sheet. If it’s a cash flow hedge, it’s your anticipated forecast,” Baumann further explained, highlighting the intricacy of these calculations. The hedge ratio should be adjusted based on the probability of projected cash flow, according to Baumann’s advice—higher for the coming quarter and possibly lower for transactions expected six months or a year later.
Leveraging technology for enhanced risk management
In the era of digital transformation, technology serves as an essential tool in the corporate hedging process. Activision Blizzard, as Handler shared, utilises an in-house bank supported by a treasury system for their FX activity. The concept of an “in-house bank,” often involves the consolidation of excess cash overseas into one tax-efficient country. The intercompany loans then dictate exposure, which can be hedged accordingly.
Treasurers also addressed potential challenges, such as bank issues with Know Your Customer (KYC) and credit approval processes, especially when a subsidiary needs to serve as the counterparty for the derivative. Baumann underscored the importance of having an International Swaps and Derivatives Association Agreement in place, which aids in identifying trading parties, enhancing transparency, and ensuring consistency across the board.
Furthermore, treasures offered invaluable advice to their peers. Robert Huang, senior treasury manager at CrowdStrike, emphasised the importance of adaptability without straying from the core strategy. Huang candidly stated, “be ready to do nothing and be ready to do something quickly.” He pointed out that while a well-tested hedging program should remain consistent, businesses should also be prepared to respond swiftly to changes in business conditions or models.
Meanwhile, Baumann suggested adopting a broader perspective and championing inclusivity in team-building, emphasising that hedging should not be an isolated finance function but should involve a cross-functional team including sales, procurement, and other business units. Baumann also highlighted the criticality of corporate governance and a firm grasp of foreign exposure, asserting, “Understanding your foreign exposure is not an option—it’s an imperative.”
This panel discussion illuminated the labyrinth of corporate hedging strategies, shedding light on the vital role of consistency, preparedness, and leveraging various resources in crafting an effective hedging strategy. The insights shared underscore the need for a consistent approach, a robust plan, and the capacity to rapidly adapt, which are not only integral to hedging strategies but are indeed at the heart of successful business operations. In this volatile and unpredictable world of international finance, such advice carries substantial weight.
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