Managing risk from global currency fluctuations
A key challenge for corporate treasurers
- Lack of visibility into FX exposures and reliable forecasts
- Boards do not receive sufficient information on FX risk, limiting their ability to challenge and guide
- Technology and innovation are important enablers to achieve efficient and effective FX processes
14 March 2016: With currency shifts making a significant impact on company profits, Deloitte surveyed 133 global corporations on the challenges that 2016 is presenting in managing currency risk effectively.
More than half (56%) the respondents to the 2016 Global Foreign Exchange (FX) Survey report they lack visibility into FX exposures and reliable forecasts, which they identified as their biggest challenges in managing FX risk.
Steven Cunico, Deloitte Treasury and Capital Markets lead Partner said: “This year’s volatility in the currency exchange markets shows similar levels of foreign exchange uncertainties as in 2015.
“Corporate treasurers are significantly challenged by the lack of visibility into their organisation’s FX exposures, as well as the different expectations around interest rate policies, quantitative easing removals, de-pegging of some currencies and various actions by global economies.
“If you can’t see it, you can’t manage it,” Cunico said. “Without accurate measurement, value erosion from negative currency rate movements can’t be anticipated or prevented.
“The challenges in reporting on FX risk have always been around, but as companies become ever more international, and a period of relative calm in the FX markets has turned unsettled, this will have an even greater impact,” Cunico said.
Nearly a quarter (21%) of survey respondents, do not track FX risk management performance at all.
Hussein Hussein, Deloitte Foreign Currency Risk Management Partner in the Assurance & Advisory practice said: “The lack of automation is a significant challenge in identifying FX exposures. Sixty two per cent of survey respondents indicate they use manual forecasts. And our survey shows a direct correlation between levels of automation and forecast confidence.
“The chances are you will hedge less if you don’t believe the forecasts. Manual information and processes cause late and unreliable forecasts. In fact, inaccurate forecasts, poor communication on changes in the forecasts, and non-transparent exposures, make up the top-three sources of ineffectiveness in managing FX risk.”
While more than half the respondents (63%) felt that the board and executives receive sufficient information on FX exposure and risk management, only 41 percent report tracking impact on gross margin and other profitability measures such as earnings per share impact.
Hussein Hussein said: “If the exposure risk information is not being used to shape year-on-year performance, as opposed to just the here-and-now, long term strategies cannot be developed effectively. Only 11 percent of those surveyed cited managing year-on-year financial performance as a primary hedging objective.
“It is important that treasurers create a business model that is FX rate neutral. Australian Corporate Treasurers need to think beyond hedging. Derivatives can only buy you so much time while you adjust your business models. Given the volatility in the markets it is too risky to leave risk exposure in the FX markets to chance.”
Key survey findings
- Treasury challenges - Lack of visibility into FX exposures and reliable forecasts, as well as the manual nature of exposure quantification, is a challenge for nearly 60% of respondents. Without accurate measurement, risks cannot be managed effectively. The lack of visibility could stem from the fact that nearly one third (31%) of corporations rely on three or more sources to identify exposures.
- The board agenda - According to 37% of respondents, boards do not always receive sufficient information in relation to FX risk, which limits the board’s ability to challenge and guide. Treasurers should consider opportunities to communicate key FX risk metrics aligned to wider financial and strategic measures.
- Hedging strategies - Primary hedging strategies (rolling, layering, and flat hedge ratio) vary by industry, but overall hedging strategy objectives are focused on protecting cash and minimising volatility in income statements.
- Treasury structures - Organisations with centralised models report a higher number of benefits and fewer challenges than those with decentralised models.
- Use of technology - Technology and innovation are recognised as important enablers to achieve efficient and effective FX processes, yet 59% of corporations surveyed use two or more information sources to identify exposures and 62% rely on manual forecasting processes.
The findings of Deloitte’s 2016 Global Foreign Exchange Survey are consistent with the results of the 2015 Corporate Treasury Survey where the need for better systems to bring exposure visibility and management of FX risk to the attention of boards was a key challenge.
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