For corporate treasury, this means assessing the ability of internal processes to adapt and react in a fast-moving environment. The consequences of extreme volatility can seep into every corner of a business, bringing challenges to revenue forecasting, throwing into question the accuracy and timeliness of data. Elsewhere it crimps companies’ ability to manage foreign currency risk, raises the cost of debt and throws off key analysis behind M&A activity, spiked since the pandemic. “Extreme events not only impact underlying price levels and volatility, but also the relationship between different portfolio exposures,” she says.
A successful risk management strategy begins with drawing up a framework, says Pidkuyko who notices a spike in client demand to shape robust structures in anticipation of continued volatility. Frameworks also help instil confidence regarding hedging. Treasury teams’ key concerns around hedging include mistakes around timing, using the wrong instrument, balancing different instruments or finding the optimal tenor. Yet using established frameworks smooths the process and lends confidence. “After reviewing their risk management strategies, we have seen clients move from treating options as a forbidden word, to adding and actively using them alongside other hedging instruments,” she says.
A flexible and dynamic hedging strategy can turn volatility into a friend, rather than a foe. A review of risk management should begin with exploring risk tolerance levels and aligning this with companies’ financial objectives. From this, treasury can decide how much, and which strategy, to hedge bearing in mind the importance of exposures constantly changing, and the need to re-evaluate. She also advises on the use of natural hedges to help optimise the cost of risk management. “Another area we have been working on with clients is the shift from a static approach to a more dynamic hedging strategy.”
In one dynamic example, a portfolio review helped a client establish a hedging strategy for forecasted cashflow exposures, she continues. Historically, this client used to hedge forecasted cash flows in a static format with a maximum tenor of one year. Although operationally easy to implement, it didn’t always help achieve the company’s key hedging objectives around reducing P&L volatility. “Establishing a framework revealed the benefits of a more layered approach while extending the maximum tenor of hedging,” says Pidkuyko.
FX, commodity and debt management
Once clients have an established framework, they can begin to manage FX, commodity or interest rate risk. With frameworks in place, she also notes growing client confidence in hedging emerging market currencies where interest rate differentials can drive significant carry, and volatility makes leaving unhedged exposures costly. Elsewhere, inflation risk mitigation has become a more important area of focus for companies across different sectors, especially since higher global inflation can feed into FX volatility. “Project managers may want to pay more attention to hedging to prevent slippage of input and output prices along the life of a project,” she says.
Here, Standard Chartered’s strategies include working with clients to establish the impact of the key inflationary drivers in the business and the potential adjustments to risk management of FX, commodity and interest rate exposures. It can also include introducing inflation linked derivatives into hedging strategies, she says.
Over the last year, Pidkuyko has worked with clients to re-assess their tolerance to floating rate debt, exploring the impact of volatility on refinancing and different debt durations. “We also work with clients to analyse specific factors such as cyclicality and capital structure to highlight any natural hedges or potential pressure points for clients. As a final step, we run a Debt Portfolio Optimisation Model to determine the optimal fix vs float mix,” she says. “With cost of debt concerns, we have seen a lot of interest in pre-hedging risk linked to future financing needs.”
Pidkuyko concludes with a final note on governance. Treasury teams need to align their risk strategy to key financial imperatives and risk tolerance levels. Governance structures also need to ensure that any risk management strategy is flexible enough to be nimble and quick when a market shifts. “This is key to ensuring volatility stays your friend and doesn’t become a foe,” she concludes.