Fx Risk Management for Corporates
How important is it to have a customized Hedging and Forex Risk Management policy for your company?
To say the least, a good policy prevents unexpected financial losses and boosts profits. Good FX Risk Management by Corporates makes the critical difference, where the margins are thin. So it is essential to do the regular due diligence of the company’s hedging policy and Risk Management for Forex policy and see what changes/updates are required. We have been in this industry for 20 years and have seen many currency movement cycles. We decided to list three of the 15 critical parameters which are required for a robust Hedging and Fx Risk Management for Corporates.
An important starting point is the Identification and Measurement of Forex Exposure. What is the Fx exposure of your company and what are the associated timelines of this exposure? Based on our experience for Fx Risk Management for Corporates, we have noticed that 95% of the companies are not accurately identifying the Fx exposures for various reasons. How do you accurately, comprehensively and objectively identify the Fx risks? The Fx risk cycle is different from the banking, accounting, and economic risk cycles. The starting point for us when we do Fx Risk Management for Corporates with our advisory clients has been to understand their business cycles and associated cash flow trends. We then work with them to identify the actual forex risks they have.
We also need to understand what kind of results are desired by the company with respect to its Forex management? Hedging strategy and objectives are to be aligned with the business objectives and Investor’s objectives. Hedge strategy is to be optimized within the cost, profitability, liquidity, cash-flow, covenants, and commitments of the business to its various stakeholders. (300)
The next step would be to develop a transparent Performance Management to measure the gains and misses related to the forex decisions that are implemented. Most treasuries manage performance, hedge costs, and savings on a broad basis. Ideally, the measurement should be specific, detailed, numerical, and should be done in a disciplined manner as frequently as possible. The hedging policy needs to define the optimum level of performance management and these numbers need to be reviewed and updated so that it is relevant.
To implement the defined strategy and policy-the the execution machinery of the company needs to be smoothly operational. We have seen so many times in our experience that good forex decisions bring results only when they are implemented in the markets in an accurate, prompt, and cost-effective way. Each decision is both an opportunity and a risk until it’s affected within the defined time frame. The company’s Structure, Committees, and Teams are to be in place to facilitate the implementation. The front, back, and mid-offices have to be adequately equipped as required and should be able to work seamlessly. Appropriate review structures will be required to ensure that the hedge decision making and executions are done so as to get the expected results. Ideas have value only when they have been executed effectively in the market scenario.
Check out our other article on the essentials of a Strong Risk Management Policy