A Fresh Look at Corporate FX Management

Interview talking points.

How is the increased FX volatility of 2024 impacting corporate treasurers?

In many currency pairs we have been trading in very tight ranges, with FX option volatility certainly far from elevated – so one could say “what volatility?” – at least in some markets! With many central banks working on the same page and being remarkably coordinated, the volatility feeding through the markets have been muted – however future policy divergence or other unexpected data or events may change this, the recent snap French (&UK) election testament to the “unknown” risks.

Whilst volatility in some markets may be unexpectedly lacking, there is certainly no lack of uncertainty considering elections around the globe, geopolitical tensions and macro updates.

This heightened uncertainty has affected corporates by adding a layer of unpredictability to their financial planning and risk management strategies, necessitating more dynamic and responsive FX management practices to mitigate potential adverse impacts on the company's profitability and financial stability. Treasurers should be more vigilant, being ready to adapt to rapid currency fluctuations, ensuring they can protect the company's margins and maintain competitive pricing.

How flexible should treasury FX policies be? Is consistency across all markets important, or should policy be tailored to each specific market/currency?

Treasury FX policies need to strike a balance between flexibility and consistency. While consistency across all markets provides a standardised approach, tailoring policies to specific markets and currencies is often necessary to address unique risks and opportunities. By utilising best practices – like the FX Global Code – to underpin the policy, a robust standardised framework can be achieved enabling corporates to stand ready to flex as the market/currency demands from a position of strength.

An effective hedging approach should include continual challenge and review, without this, policies risk becoming outdated and misaligned with market dynamics, changing exposures, or company strategy. A regular review cycle is critical to ensure that policies remain relevant and effective, and treasurers should be prepared to adjust policies to reflect current business needs, growth aspirations, and market conditions.

Cutting-edge corporate treasurers seem to be getting more sophisticated when it comes to hedging FX risk… what are some of the main ways you see this manifest? And what tip(s) would you give to treasurers who don't hedge or hedge a specific percentage of their exposure no matter what?

Those at the cutting-edge are recognising that markets have changed over the last few years - after the raft of black swan events - and are adapting to the new normal, upskilling or seeking out support from experts to adopt more sophisticated hedging techniques, employing advanced financial instruments and bespoke solutions to manage FX risk more effectively. Some of the main ways this sophistication manifests include:

  • Use of Options and Forwards: By incorporating both options and forward contracts, treasurers can secure worst-case protection while also targeting better rates for future trades. Utilising options, focussing on creating value across the portfolio to manage FX risks more holistically – whatever the market throws up next!
  • Managing Forward Curve Exposure: With longer-dated exposures, thinking about the components of the FX exposure is critical – for example looking at solutions to hedge interest rate differentials, capturing value from favourable forward curves – derisking future hedging against uncertainties including potential central bank divergence.
  • Credit Risk Management: Using derivatives to limit or cap credit line exposure ensures that the ability to hedge remains intact, even when market conditions shift unfavourably for the existing portfolio positions. Noone wants to deliver the message that you have been stopped out on hedging when it is the most attractive to extend the hedge.

For treasurers who don't hedge or follow a rigid percentage-based hedging approach, the tip is to remain flexible and responsive to market changes. A fixed strategy might lock in losses which ultimately increases the risk to the business or prevent one from securing opportunities to de-risk, whereas a more dynamic approach can better align with evolving market conditions, demonstrating the need for flexibility.

The concept of netting to minimise corporate FX exposures has existed for many years. Have there been any recent developments that have increased netting efficiency as a treasury tactic?

Netting is a valuable tool when the offsetting exposures are of the same type and tenor. However, when there are differences such as exposure type, accounting treatment, tenor or profile of underlying exposures, netting should be approached with caution to avoid unexpected and unwanted volatility.

It is always best to understand what your gross exposures are first and foremost as well as what you are trying to achieve. By understanding your risk, how this will move in a stressed market event and how each will impact your company at a headline level you can best assess how to approach on a net or gross hedging basis to meet your objectives. For example – where exposures net over a 5year horizon in totality, that does not mean that you can net and have no FX volatility over the individual years within that horizon – y netting you may actually increase total volatility. Also intra period implications are often very important for wider reasons – tax consequences, covenants and credit ratings and liquidity.

How is technology helping to change how treasurers approach FX, both from an efficiency and a risk management perspective?

Technology is revolutionising how treasurers approach FX management, enhancing both efficiency and risk management. Automated trading platforms, advanced analytics, and algorithmic trading tools help treasurers to execute trades more efficiently and at better prices. Technology also facilitates real-time monitoring of FX exposures, automated hedging strategies, and improved reporting capabilities.

However, while technology enhances productivity, it's crucial for treasurers to maintain a deep understanding of the underlying processes and risks and not turn the management of risk into a process. The focus of technology should be on improving the quality and speed of data and efficiency of execution and supporting infrastructure to free up more time to consider the risk in the context of all other information available.

What does treasury best practice in FX management today look like to you?

Best practices in FX management today involve a combination of strategic foresight, flexibility, and technological integration whilst being underpinned on a policy governance foundation integrated with the FX Global Code of Conduct. Treasurers should:

  • Regularly Review and Challenge Policies: Ensure that FX policies remain aligned with current market conditions and company strategies, integrating the FX Global Code as a policy requisite.
  • Use a Mix of Hedging Instruments: Combine options, forwards, and bespoke solutions to manage different aspects of FX risk suitable to the risk and exposure that is being managed.
  • Focus on Value Creation: Use derivatives not just to secure a P&L rate but to create a corridor of P&L certainty and unlock value.
  • Maintain Strong Relationships: Build and maintain strong relationships with banking counterparts for smooth execution and better pricing.

By adopting these practices, treasurers can better navigate the complexities of FX management and contribute to the overall financial health and strategic objectives of their organisations.