Accurate, timely data key to navigating currency volatility

In the third quarter of 2016 alone, multinationals lost nearly US$11bn due to currency volatility – with North American corporations absorbing nearly US$7bn of those losses.

At first glance, these findings might suggest corporate treasury professionals and finance directors – those tasked with managing an organisation’s foreign currency exposure – are not doing their jobs. Yet in all likelihood, these losses can be traced back to incomplete data informing hedging decisions.

Findings from another recent global survey from Deloitte bear this out: more than half of corporate treasury executives surveyed in 2016 said they lacked visibility into their currency exposures.

This is somewhat understandable. Global currency management is a complicated field, even for those treasury executives expected to deal with it on a daily basis. A chief financial officer (CFO) cannot be expected to know the interest rate differential of the Brazilian real (BRL) versus the US dollar (USD); board members should not need to know where the Russian ruble (RUB) is going; and C-level executives have greater concerns than their dollar/euro pairing.

Instead, executives should be treating their currency portfolio as they do any investment portfolio; with an eye on establishing an acceptable level risk and return – or, in risk management terms, cost-adjusted risk.

Yet a surprising number of corporations do not do this. Many executives simply decline to enhance currency risk management, because they have been led to believe the process is too complicated, too expensive – or both. While that may have been true back in the 1980s and 1990s, it is no longer the case.

The need for reliable data in managing currency risk

Managing currency risk – even against the current backdrop of high volatility – is actually fairly easy to do if you have access to (and subsequent confidence in) the underlying data.

Therein lies the problem. Remember that 50%-plus percent of executives who said they lacked “visibility” into their currency exposures? They’re missing accurate and timely data – and the need for reliable data is especially acute in today’s volatile market because, without it, currency impacts can be widespread.

But in large multinationals, it is common to find a variety of barriers preventing access to reliable data. These can include inconsistencies in how multicurrency transactions are recorded; variations in how re-measurement rules are tracked; or breakdowns that occur when organisations grow organically, or through acquisitions.

In some corporate environments, currency risk calculations are configured in silos across the enterprise. Collecting, compiling and standardising these various datasets is a manually-intensive exercise that can take days, or weeks, to complete. When the analysis is done, the findings are out of date.

Many times corporations know this, so they settle for an “80/80” confidence equation, where they accept having access to only 80% of their data, and, since it is not timely, they are only 80% confident in that data. This translates into an average hedge efficiency of about 64% (80% X 80% = 64%).

In each of the scenarios, it is inaccurate, incomplete and untimely data leading to inaccurate hedging. Inaccurate hedging leads to surprises – and, at the end of the day, a chief executive officer (CEO) or executive board does not want to communicate surprises to shareholders.

Mitigating currency “surprises”

Consider this: We are in the midst of one of the most volatile currency climates in recent history. In the most recent 11 quarters since the start of 2014, there were more significant foreign exchange (FX) “events” than occurred in the entire 11 years leading up to this period. Moreover, there is no indication that this volatility will be subsiding anytime soon.

In other words, this is the wrong moment for treasury executives to be taking chances with incomplete or unreliable data to manage their exposure. This is not the time for surprises!

Instead, they should be taking steps to ensure they are leveraging the most comprehensive and complete data from across the organisation and using it to formulate an accurate picture of currency exposure. By establishing a precise, holistic vantage point, treasury can be confident in what it communicates to C-level executives and board members, who in turn can be confident in their hedging decisions.

To more easily visualize this, executives can borrow a tool from the investment world and map out an efficient frontier, with cost occupying the horizontal axis and risk represented by the vertical axis. It is a simple technique, but it is an effective way to illustrate a variety of risk-reward scenarios and determine an organisation’s appetite for currency risk. In currency exposure management, the efficient frontier is referred to as Cost and Risk Efficiency, or CoRETM.

Once an acceptable level of risk is determined, it frees up C-level executives to focus on running the organization. They no longer have to discuss where the RUB is going. Instead, they can operate with confidence in their hedging choices.

As a currency exposure management specialist, FiREapps has been working with multinationals for nearly 20 years, helping them analyse their data and identify their currency risk. We know from experience when treasury executives lack true insight into their currency exposure, it is because they do not have the relevant data.

The group has seen companies with hedge efficiencies on their balance sheet of 65% realise improved hedge efficiencies of 99%, simply by leveraging accurate, timely information. Once they attain this degree of confidence, board members no longer concern themselves with currency volatility. They know they are positioned to withstand currency shifts. Additionally, from a forecasting point of view, we continue to see companies increase their hedge ratios by 20% or more.

When it comes to managing currency exposures – even during periods of intense volatility – data equals confidence, which materially impacts results from a cost and risk perspective.


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