Companies Braced for Bumpier Ride from Currency Volatility

Companies around the world expect this year to equal or even surpass the currency volatility experienced in 2013, according to the inaugural
‘Currency Risk Mitigation Survey’
produced by AFEX.

The global payment and risk management solutions specialist polled 452 businesses globally – many of them based in the US, the UK and Australia – and found that 88% foresee currency movements to be as or more volatile in the next 12 months than the preceding year.

Half of the respondents will employ a hedging strategy in 2014, with 35% expecting to hedge more than they did in 2013. For companies already hedging in some fashion or another, the most popular methods are the forward contract (44%), natural hedging via geography (5%), options (3%), futures (1%) and swaps (1%).

The poll also indicates that levels of international trade are set to climb as more businesses look overseas for growth, with 37% of businesses seeking to conduct more global commerce than in 2013, and Western Europe, China and Asia (excluding China, India & Japan) expecting to see increased trade.

“The survey results correlate with our historic client demand, as we’ve seen our client base more than triple since 2006,” said AFEX chief executive officer (CEO), Jan Vlietstra. “As more businesses seek to grow beyond their borders, they take on additional and often unforeseen risk, requiring counsel in addition to a robust and secure payments platform.”

One of the most important considerations is to evaluate how much of a firm’s revenue is exposed to currency risk. US clients surveyed had the lowest revenue exposed, with an average of 26% exposed against an average of 34% for companies in the UK and 37% for those in Australia. The US in general is less reliant on outside goods, whereas the UK and Australia tend to rely more on imports.

In addition to currency volatility (43%), other top challenges facing respondents seeking to mitigate risk include global economic policy uncertainty (17%), lack of currency expertise/savvy (16%), access to accurate timely market data (10%), difficulty assessing currency exposure (9%), cost of hedging (4%) and lack of automated processes/platforms (1%).

“Devising a hedging strategy and keeping a long-term view is of utmost importance, especially as it concerns smaller businesses where the owner wears many hats,” said Guido Schulz, global head of strategic management at AFEX.

“Even large multinationals can have difficulty keeping tabs on rapidly fluctuating currencies; in recent quarters large blue-chip companies have had their bottom line shaved due to unexpected currency volatility.

“While devising a hedging strategy seems daunting, once you know your currency exposure, lock in a hedge that will provide certainty for your business and don’t fret about short-term ebbs and flows in the currency markets. Leave the casino mentality to traders and focus on growing your business in a prudent manner.”

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