Xiaomi Global Markets: Xiaofeng He, Qian Wang, Junjie Li, Hong Zhou, Ming Yan, Jiashan Li and Wen Fu.
Xiaomi Corporation is a China-based investment holding company principally engaged in the research, development and sales of smartphones, internet of things (IoTs) and lifestyle products, the provision of Internet services and investment business.
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With an increasing global footprint, Xiaomi faced the challenge of effectively managing its exposures in multiple currencies. Xiaomi produces various electronics products and markets them in over 100 countries. It had total sales of US$48bn with global FX exposures to most of the major developed economies and emerging markets in 2021. The challenge for the company was managing its FX risks while remaining competitive in product pricing and honouring the company’s commitment to ‘provide the best quality at an honest pricing’.
Xiaomi worked closely with Citi to determine its risk target as the first step, which formed the basis for the risk management framework set-up. A clear risk management target is crucial in ensuring that the risk management strategy is both quantifiable and actionable, thereby reducing confusion and inefficiency in the process. Xiaomi’s risk target, which aligns the treasury objectives with the overall firm objectives, plays an important part in designing a suitable risk management framework.
When designing Xiaomi’s hedging programme, it was key to provide stability in the achieved FX rate (to maintain competitive product pricing) and to be cost-efficient at the same time. Given Xiaomi’s huge portfolio of currencies, it is important that Xiaomi leverages on differential hedging costs, currency volatilities and correlation between the currencies to arrive at an optimal hedge ratio customised for each currency to achieve their risk target.
The next step Xiaomi and Citi conducted was to overlay the base model with a signal model that aims to adjust hedge ratios based on signals that indicate if the currency will appreciate or depreciate in the short/medium term. The model uses five market-driven factors and seven fundamental factors to rank the currencies and measure them relative to their historical position.
Based on the output, Citi adjusts the hedge ratio for its various exposures. Xiaomi further categorises the currencies into A/B/C etc and sets its risk management policy accordingly. For example, if Xiaomi is setting up a business in a country whose currency has been categorised as C, ie highest risk, then it would correspondingly proceed with greater caution in its financial planning.
Xiaomi currently uses a mix of vanilla FX forwards and foreign currency financing to manage its hedge ratios.
“We constantly review structured products to be included into our hedging strategy,” explains Michael He, Head of Global FX.
FX hedging is encouraged by senior management’s appreciation of how FX risk management plays into the overall profitability of the company. Innovation is displayed as the unique model builds on top of the usual value-at-risk (VaR) model by overlaying that allows Xiaomi to incorporate predictive signals.
Return on investment (ROI).
Manual intervention reduced.
Future proof solution.
Exceptional implementation (budget/time).
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