FX Risk Challenges
Corporates find themselves in an increasingly competitive and unpredictable business environment where FX volatility is “the norm”.
Conventional FX hedging strategies have become ineffective, and often remain informal. Decision making based on emotion and speculation is commonplace and adds rather than reduces risk.
Without an effective risk strategy and policy, jobs, reputations and businesses are on the line.
Large, one-off or ad-hoc hedges, can result in a commitment to a specific spot or forward FX rate on a sizable proporion of your exposure. This can create large, negative P&L impacts and create hedge ineffectiveness. It also limits a firm’s ability to adapt to changing forcasts, or responsibly take advantage of market upside.
It is unlikely that you will be able to continually ask for discounts from your suppliers when exchange rates move against you. This can damage commercial relationships, increase your cost of goods sold and impact profit margins.
FX volatility may force you to make changes to the pricing of your goods/services in order to keep profit margins intact. This may make you uncompetitive relative to your competition, resulting in a significant reduction in revenue from customers switching to a cheaper supplier.
Investor demand for earnings growth stability has resulted in finance professionals needing to look beyond hedge performance within a particular fiscal year. Without a more pro-active hedging strategy that creates stable effective hedge rates during and across fiscal years, your stock price could fluctuate significantly.
Without a well-defined, adhered to FX risk policy, explaining when, how much and how far forward to buy foreign currency, finance professionals can lose control over their FX exposure, and it can become easy to adopt more speculative FX hedges which can add volatility to the P&L.
We don't have to be smarter than the rest, we have to be more disciplined than the rest.