Currency Risk a Priority in Corporate Contingency Plans

First introduced to currency risk management while working for a Silicon Valley-based manufacturing company as international treasury manager, Helen Kane founded Hedge Trackers in 2000 as a FAS 133 consulting and outsourcing firm that offers technical, yet practical solutions to Fortune 100 to 1000 companies in North America. Its specialisms include guidance and support in the fields of accounting and hedge programme management.

Q (gtnews): Has unrest in many regions of the world persuaded companies to step up their contingency plans against political risk and civil unrest?

A (Helen Kane):
A major part of corporate contingency planning for political risk and civil unrest may include currency volatility protection. It doesn’t take an Arab Spring or Venezuelan meltdown to cause issues here; the continuing Greek financial saga coupled with the euro bond-buying has triggered dramatic, fast-moving impacts on the European single currency.

Companies that had ridden a 13-year appreciation in the euro weren’t expecting to give up most of those gains in the first quarter. Although the currency has dropped 30-plus percent over the past year, it’s the last 15 cents that have been getting all the attention – particularly for companies that were either not hedged or under-hedged.

For a company with significant assets or liabilities in a foreign currency, an effective foreign exchange [FX] hedge strategy offers all-important time to get operations organised and adjust to a new rate environment in the event that instability creates currency volatility.

What would you say are the key factors for a company establishing a contingency plan and how does the treasury department become involved?

One of the main things taught to us by recent crises is that when doing business in areas with political or social unrest, it pays to have relationships with banks that have brick-and-mortar presences in-country. When major instability occurs, banks with a physical presence – as opposed to simply an electronic one – have (relatively) ready access to cash, which can be the difference between being able to fulfill liabilities – such as payroll – or not.

Are there any particular industry sectors that can offer best practice guidelines to others in contingency planning? Conversely, are there any that you’d identify as particularly weak and which need to raise their game?

There seems to be an inverse relationship between margins and understanding of currency exposure and risk mitigation. Contract manufacturers, for instance, tend to operate with extremely tight margins; they are extremely sensitive to – and knowledgeable about – the effect that even slight currency shifts can have on them. By contrast, industries with larger margins are far less sensitive to small currency movements, and as a result tend to take less care to insulate themselves via hedging.

How great a role is more sophisticated technology playing in helping companies plan for ‘worst-case’ scenarios?

In a true ‘worst-case’ scenario, it is conceivable – maybe even likely – that employees will not be able to access their workplace, or that physical systems may be damaged or destroyed. This makes the software-as-a-service (SaaS) model a critical part of contingency planning. The more software and data hosted in a secure, private cloud environment, the better. As long as a country’s internet backbone stays intact – as we’ve seen in even the most crisis-ridden regions of the world – you will still have access to systems, and disaster recovery is dramatically simplified.

What newly-emerging risks, which possibly aren’t yet on a company’s radar, should treasurers be considering and drawing to the attention of colleagues?

Treasurers should take care to draw colleagues’ attention to foreign currency exposure and related risk. In recent years, major currencies – such as the euro [EUR] and yen [JPY] -have experienced the kind of swings once limited to third-world currencies. It’s likely that this was not a one-time event; a dramatic softening (or appreciation) in a major currency can, and will happen again.

We have also seen increasing liberalisation in the peg between the dollar [USD] and the Chinese yuan [CNY]. Corporations should be preparing themselves for a potential decoupling of the currencies, which could have untold ramifications on currency markets, supply chains and other business areas.

Finally, hyperinflation is still a real threat in regions throughout the world. This presents risks even to companies which believe themselves to have successfully passed currency risk on to foreign partners; in the event of a hyperinflation scenario, a counterparty that has accepted all the currency risk could be forced out of business – or simply be made unable to fulfil contractual obligations – leaving the US company exposed.

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