Coronavirus volatility: How can corporates ride the uncertainty in exchange rates?

April 22 2020

Mark O’GormanHead of Corporate Risk Advisory

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Volatility in FX is creating uncertainty around costs, sales volumes and financing requirements.

In the current, unprecedented environment, investors are facing significant volatility in exchange rates (FX). While volatility alone is nothing new, supply chains and customer buying patterns are also in a state of flux.  As a result, there is a great deal of uncertainty, especially around costs, sales volumes and financing requirements.

To read the full article, professional investors click here.

Three questions to ask yourself when reviewing your hedging strategy

Against this backdrop, reviewing your hedging strategy is vital:

  • Do you hedge the maximum or minimum exposure in your forecasts?
  • What are the impacts on both your cashflow and your accounting profit & loss from that decision?
  • How can hedge-product choice and hedge accounting help align these (sometimes conflicting) metrics?

Three steps to help determine if your hedging needs adjusting – and how

Step 1: Review your objectives and policy

When beginning a review process, it’s always sensible to go back to the beginning and review your original objectives and policy as well as targets and metrics — and don’t forget to look at the tools available to achieve these objectives, too. We recommend, as a first step, to review this and identify whether your policy is fit for purpose or requires amending at this moment in time.

Step 2: Analyse key data and consider economic versus reporting considerations

To determine the best approach to hedging uncertain exposures have a close look at your financial data. Identify your risk appetite and analyse the costs and benefits of different hedging options. Remember, there are differences between the economic considerations and the accounting considerations.

Step 3: Look objectively at alternative products – are they right for you?

As we enter our new normal in terms of market conditions, now is a great time to take another look at the products you're currently using and asking whether they are right for you, and right for now.

New environment, new considerations

There are a huge number of fresh and different considerations to take into account as our new normal begins to take hold and carve its own environment for corporates. The key takeaway here is to use these challenging and uncertain times to take stock of your existing position and consider whether your strategy and approach is in need of a change, or whether it’s great just as it is. 

We’re focussed on bringing you regular insight to help navigate through this environment, so stay tuned for more.

To read the full article, professional investors click here.


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