Kyriba’s latest currency impact report confirms the falling negative impact of foreign exchange fluctuations on North American and European corporate earnings since the end of 2022. Overall losses from currency movements in Q123 totalled US$11.16bn, the lowest level since the first quarter of last year.

However, the authors of the MillTechFX UK CFO FX report 2023 warn against complacency (‘it is likely currency volatility will be prevalent over the next year’) and HSBC Global Research’s currency outlook strikes a similarly cautious note, suggesting that FX will have to navigate many sources of uncertainty over the next 12 months including central banks lowering their policy rates and a busy election calendar.

California-based Intuitive Surgical’s primary currency exposures for revenue are the euro, pound, Japanese yen, Korean won, Taiwan dollar and (for expenses) the Swiss franc. For its balance sheet, the major currency exposures are the above currencies plus the Indian rupee, Mexican peso, Chinese yuan and Canadian dollar.

“Our first action when evaluating currency exposures is to determine if there are any operational changes we can make to mitigate currency exposures,” explains Brian King, Treasurer and Head of Investor Relations, Intuitive Surgical. “We evaluate legal entity functional currency, intercompany currency, conversion of cash balances, and timing of settlement of intercompany balances and other payments.”

Intuitive Surgical has two main programmes for minimising the impact of currency volatility on its P&L. The first is its cash flow hedge programme, where it forecasts future revenue and expenses denominated in foreign currency and enters into derivatives that are designated as cash flow hedges against those forecasted transactions.

The other programme is the balance sheet hedge or remeasurement hedge programme, where the company enters into derivative contracts that are not designated to revenue or expense and mitigate remeasurement exposure of net monetary assets and liabilities on its balance sheet.

“We don’t have a policy that determines when we should re-evaluate our hedging strategy,” says King. “However, we track and measure various metrics within our balance sheet and cash flow hedging strategies at least monthly. If we determine there are large deviations in hedge effectiveness or coverage, we re-evaluate our existing strategy and make an assessment of whether we should make any changes to currencies covered or types of revenue to include/exclude. Changes in accounting rules have also been an opportunity for us to re-evaluate our hedging strategies.”

FX risk management is also a major issue for Save the Children, a global membership organisation comprising of Save the Children International and 30 national members that raise money from donors in their home country.

Treasurer Edward Collis explains that in 2022 the movement raised £2.5bn globally, of which approximately £1.5bn was spent by Save the Children International.

“We receive mainly G20 currencies, primarily dollars, euros and pounds, which we broadly sell for our functional currency (US dollars) and then we go and buy the local currency,” he says. “We fund the local country offices in their own currency twice a month.” Most of these local currencies are challenging to hedge given limited local FX liquidity – in some of these jurisdictions there is effectively only a dollar spot market.

“The degree of uncertainty in terms of cash flow also makes it quite difficult to hedge all the currencies we handle,” adds Collis. “However, we do have a hedging programme for sterling since Save the Children International’s headquarters are in the UK and a material portion of our overheads are in sterling. Although we receive pounds in donations to Save the Children UK, we have quite a substantial sterling spend that is larger than the pounds we get from Save the Children UK.”

The organisation’s hedging programme is a rolling forward vanilla programme that goes out a little bit over 12 months to reduce volatility on budgeted cash flows. Its currency management strategy is reviewed once a year, although Collis notes that the hedging policy has not been reviewed since before the pandemic and is currently under review.

Approximately 80% of publishing, business intelligence and exhibitions group Informa’s cash flows are USD or USD denominated. The company looks to mitigate volatility in its financial ratios (such as leverage) and cash flow by broadly aligning the currency of its debt to cash flow currency observes Group Treasurer Richard Garry.

“We are constantly reviewing the effectiveness of our strategy and formally meet with other colleagues in the business to review effectiveness every month,” he says. “We also undertake a fundamental strategy and policy review annually, which is formally reviewed by our treasury committee.”

The MillTechFX report referred to a drop in the number of UK corporates hedging their FX risk, although there was an increase in the number that had implemented longer hedge windows.

“Companies are returning to medium-to-longer-term hedges and we have seen some of our clients even consider 18 month strategies again,” says Abhishek Sachdev, CEO of Vedanta Hedging. “Although typically based upon vanilla forward contracts, we are seeing an increase in the use of more exotic options for the periphery of corporate exposures – typically 10-20% of currency requirements.”

Helen Kane, Risk & Exposure Fellow at GTreasury observes that the most common risk in hedging is sizing the exposure. “Your ERP can detail the exposures on your books, but the exposures that impact margin (and are responsible for making or breaking profitability) aren’t as easily determined,” she suggests. “This is the hidden FX – the rate changes that keep reported revenue flat when sales have beaten their plan or increased costs too quickly to adjust pricing to protect margins. To hedge this, we are challenging financial planning and analysis to forecast not only how many units will be sold in which period, but where in the world those sales will be made.”

Companies with the most successful hedging strategies tend to have a good understanding of their cash flows and forecasts and employ dynamic, managed hedging programmes that are often a combination of forwards, options and swaps.

That is the view of Daniel Jack, Senior Trader at Monex Europe, who says this approach allows for downside protection, as well as being opportunistic and taking advantage of favourable market moves.

Eric Huttman, CEO of MillTechFX says companies are also taking action to mitigate the risk associated with only having one or two banking partners. Research published by the company between July and October noted that 88% of North American and 73% of UK-based CFOs were looking at diversifying their FX counterparties.

“This year’s banking crisis highlighted the importance of having access to multiple counterparties and it is now widely known that a bank’s failure can cause serious short-term liquidity issues,” he says. “Should a banking counterparty no longer be able to function as an FX provider, this can affect vital expenditures such as payroll and supplier invoices, even if only for a few days.”

Many corporate FX risk programmes leverage data analytics to minimise the hedging decisions they need to make observes Bob Stark, Head of Market Strategy at Kyriba. “A quantitative assessment of currency risk exposures can reduce the need to use derivative instruments, taking greater advantage of natural currency offsets,” he says. “Further, analytics such as parametric VaR (using mean-variance analysis to predict future outcomes based on past experience) offers greater hedging efficiency, which improves coverage and reduces transaction costs.”

Stark reckons it is critical for CFOs to align with internal stakeholders to mine ERP and internal systems for detailed FX exposure data to better quantify the impact of currency movements on balance sheet, income statement and cash flow data.

Amol Dhargalkar, Managing Partner at Chatham Financial agrees that most companies will attempt to mitigate FX risk through natural offsets within the organisation, but acknowledges that for the majority of companies those strategies cannot remove as much risk as they would like.

Jack suggests that to effectively manage currency risks, companies must gain a comprehensive understanding of their FX exposures across various business segments, geographies and trading activities. This involves:

• Thorough data collection – gathering accurate and timely data on revenue, expenses, debt and other FX-sensitive factors.

• Regular monitoring – continuously tracking FX movements and their impact on company finances.

• Dynamic risk assessment – regularly reassessing FX exposures and risk tolerance levels in light of changing market conditions.

• Integrated risk management – integrating FX risk management into overall risk management frameworks.

Dhargalkar also refers to the importance of gathering data effectively and observes that corporates are looking to automate as much as possible, ideally through an API between their different ERPs and their risk system. “Additionally, they are looking to be proactive in their FX strategies by utilising business intelligence tools to have all appropriate data at their fingertips for senior stakeholders,” he says. “Leadership is looking for the ability to answer FX-related questions quickly and having all of their data available in an easily digestible platform is key to managing risk effectively.”

According to Huttman, the ability of a corporate to achieve a complete view of its FX exposure is largely determined by whether it has a centralised or decentralised treasury system. “Many medium-sized or multinational corporates may have multiple treasury centres across the globe, which makes it difficult to have a complete view of FX exposures since each centre will be responsible for its own FX trading,” he explains.

Operationally, this approach might make sense for a larger organisation by enabling it to be more responsive to changes in different regional markets, since local teams would have more control. However, from the perspective of having a clear view of FX exposures, some organisations may consider a centralised treasury system the better option.

“Under this structure, FX trading can be carried out centrally – making it easier to view and manage currency exposures,” adds Huttman, who says technology is also crucial. “ERP and treasury management systems play a vital role in providing finance and treasury teams with the information they need to ensure capital is in the right place at the right time. For many it is therefore a pre-requisite that their FX trading infrastructure can integrate seamlessly with these systems.”

Alex Kearney, Corporate UK Dealer at Ebury says an understanding of upcoming currency requirements will allow clients to conduct an FX audit with their account manager, which will include forecasted amounts sold or purchased, budget and target rates, and the impact of seasonality.

“They also need to ascertain a level of risk aversion – for example, very risk averse would mean hedging 75%-100% of exposure,” he adds. “Once they have built out a strategy they should set periodic review point to assess its effectiveness.”

Kane notes a difference in approach between public and private companies where the latter are focused on the cash coming back to their parent, while the former seem to focus more on optics. “Interestingly, this can lead to very different hedge programmes, especially when elaborate tax structures are involved,” she concludes. “It is surprising the number of public companies hedging money they owe themselves, creating hedge positions that are at odds with their economic exposure.”