Managing currency risk – today’s imperatives

To date, 2015 has seen exceptional volatility in the global currency markets. There are multiple causes for this, including the seemingly endless problems of Greece, the slow-down and re-balancing of the Chinese economy, the fall in asset and commodity prices, resulting currency weakness in emerging markets and the turmoil in Syria and other parts of the Middle East.

The deeply uncertain global situation demands that corporate treasuries with significant levels of foreign business urgently focus on the effective management of this sustained high level of currency risk. Corporates naturally do not want to be exposed to the very real risk of massive exchange losses. They need to understand their true currency positions with great clarity. This demands a full picture of where their exposures are originating and need to perceive the real relationships between different exposures. They also need a responsive and effective strategy to weather the storm.

The consequences of inadequate solutions

Corporates that lack the necessary tools and processes to manage currency risk are likely to be unaware of the extent and nature of their real exposures – until a sudden loss occurs. If tactical cost-cutting has led to underinvestment in effective systems support and hedging, they will lack visibility into the correlations between asset classes and currency pairs. This means they are liable to over-hedge – or to incur the potentially severe risks of under-hedging.

What is really needed?

Today’s imperative requires proportionate investment in tools and processes to refine corporates’ currency exposure management policies and practices by addressing the closely related topics of hedging, risk management, valuation and hedge accounting. The prime technology solutions for corporates capture all the organisation’s foreign currency exposures, integrating data from enterprise resource planning (ERP) systems and subsidiaries’ current forecasts, in an efficient straight-through processing (STP) workflow.

Exposures are identified and netted accurately, in line with the complexities of the group structure. Hedges are designated in compliance with the organisation’s finance policy, with pre-trade risk and cost evaluation so that the optimum hedge strategy (forward versus swap versus option) can be selected. STP hedge execution is automated with specialist electronic trading platforms, such as 360T and FXall, to ensure an efficient and secure process.

Hedge accounting and IFRS 9

Hedge accounting protects corporates against currency market related P/L volatility. Many corporates are now looking to early adopt IFRS 9: Financial Instruments (*with European companies’ adoption subject to endorsement by the European Union), the replacement to IAS 39, which formally takes effect on 1st January 2018. The key benefit of early adoption is that IFRS 9 is less rules-based than its predecessor, and so it offers a higher degree of utility and flexibility. Under this new standard, many corporates will be encouraged that their risk management strategy is driving their hedging decisions as opposed to the accounting rules.

Full risk visibility and response

Tools like Cash flow at Risk can now be used more actively to decide on hedging strategies and hedging combinations, after taking into account correlations amongst multiple asset classes

Fully-integrated, software-as-a-service (SaaS)-based technology can produce the precision and speed of response that is absolutely needed with today’s levels of volatility and uncertainty.  The best practice management of currency risk in today’s environment requires accurate measurement, evaluation and action across the full spectrum of relevant asset classes, on a holistic basis.


Related reading