Cash & Liquidity ManagementCash ManagementCorporate treasurers investigate new FX risk strategies

Corporate treasurers investigate new FX risk strategies

To minimize foreign exchange losses, corporate treasurers are considering new formulas to balance Cash Flow at Risk (CFaR) and Earnings at Risk (EaR)

Corporate treasurers are exploring new foreign exchange risk mitigation strategies and are open to factors like Cash Flow at Risk (CFaR) and Earnings at Risk (EaR), according to the findings from a Bloomberg survey.

CFaR and EaR are being identified amongst more than one third (34%) of corporate treasurers interviewed, thanks to the enhanced balance liquidity and earning risk that help to minimise foreign exchange losses. Amongst the treasury teams that are not using it yet, 29% are considering using CFaR and EaR soon.

The survey interviewed more than 100 corporate treasurers, financial analysts and risk managers.

The summary of the findings reported from the survey are as below:

  • 34% of respondents already use CFAR or value at risk (VAR).
  • 29% are considering using it, and only 8% have never heard of it.
  • 64% of respondents said they need to improve or are considering improvements to their company’s current hedging policy.

Barriers to CFaR-based policy

Respondents from the survey have cited explaining the policy internally as the primary challenge in implementing CFaR and EaR – 66% of respondents cited difficulties in explaining the adoption of a CFaR-based hedging policy internally and to their board.

Though there is a thriving fintech consultancy sector offering input on how to select and implement various cash flow management functions, updating technology is another challenge faced by corporate treasurers and 41% of respondents cited their company is reluctant to change its current technology.

Mark Lewis, Corporate Treasury Product Manager at Bloomberg commented: “For cash flow and earnings volatility, companies are shifting away from the outdated percentage hedging model to a risk management perspective, as they are not able to tie their old strategies to the KPIs the board is demanding.

“We have been working closely with clients to address the very real challenges of explaining CFaR/EaR to their boards and of updating their legacy technology systems. Bloomberg makes tools available that can be used by clients to backtest the change to CFaR/EaR and make it easier to explain how this technique proves out over time. Furthermore, our tools can be used end-to-end or plugged into an existing workflow, making implementation seamless.”

Other challenges cited by the respondents are:

  • 29% of respondents were concerned that such a policy would be too complex.
  • 26% of respondents said it would be too costly to implement and run.
  • 13% of respondents believe it will not provide enough benefit.

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