The geopolitical crisis in Ukraine may be spooking markets but that’s no excuse for treasurers facing FX upheavals to throw up their hands in horror, says Wolfgang Koester, senior strategist for Kyriba.
Speaking to Global Treasurer in the wake of the SaaS platform’s latest quarterly Currency Impact Report that reveals $11.98bn in total impacts to earnings from currency volatility, he says: “Corporate treasurers want stability because organisations are expected to deliver on the expectations provided by CEOs and CFOs who provide earnings and free cash-flow guidance to investors and analysts.”
But currency headwinds or tailwinds are no excuse to miss those targets – “especially when there are strategies to organically reduce net currency exposure and eliminate unexpected volatility.”
And yet the survey, released in February, found that many treasurers are not availing themselves of the tools and strategies at hand despite threats to the corporates’ financial stability, supply chain and earnings.
“CFOs have a long way to go to mitigate risk and include substantial currency gains as part of their earnings revenue,” says Koester.
FX volatility will probably worsen as other influences enter the markets, he warns, requiring treasurers to assess hedging strategies to effectively manage currency risk.
“It’s an important tool for treasurers looking to reduce the impact of FX volatility on their cash flows and balance sheets. FX forwards, swaps and options all offer different types of protection for various scenarios,” says Koester.
Kyriba’s research shows that most – but not all — treasurers use derivatives to manage currency risk and that 75 percent of finance leaders state their hedging programs are effective at protecting cash and liquidity from the volatility of FX markets.
As Koester says, most of the concerns about inflation, expected interest rate hikes, supply chain challenges and rising oil prices are being triggered by heightened tensions in Ukraine. Combined, they contribute to volatile currency markets to which treasurers must react.
The highly comprehensive survey details the impact of FX exposure among 1,200 multinational companies based in North America and Europe. All companies analysed in the report conduct business in more than one currency, with at least 15 percent of their revenues coming from jurisdictions located outside their headquarters.
The survey found that the combined pool of corporations reported $9.86bn in tailwinds and $2.13bn in headwinds in the Q3 2021.
Overall though, the survey reveals the vulnerability to currency movements of these corporates’ revenues and earnings per share. As the era of low interest rates and, potentially, a stronger US dollar concludes, these quantified impacts are a troubling sign, warns Koester.
“This next environment will become more challenging for CFOs to achieve the industry standard MBO of less than $0.01 earnings per share impact and protect their balance sheets and income statements from currency volatility,” says Koester.
Beyond the hedge
In these roiled markets, managing volatility goes deeper than hedging. As Koester explains: “While hedging can protect treasurers from short-term volatility, many organisations will simultaneously look to reduce net exposures by working with the wider business to better align payment and receivables terms, including currency alignment.”
These fundamental measures can organically reduce long-term exposure to currency risk, better protect balance sheets and profit margins from persistent strengthening or weakening of their operating currencies, he says.
Corporates are naturally more exposed to currency markets than others, especially those with globally integrated supply and value chains.
“The important takeaway here is that vulnerability to currency fluctuations isn’t necessarily bad so long as corporate treasurers set expectations internally and externally about how they plan to manage that risk,” says Koester.
Asked whether CFOs and treasurers are as aware as they should be of the vagaries of the currency markets, Koester admits they are certainly mindful of the risks but too few are tapping the available data that would make their job easier.
“It’s difficult to make data-driven decisions without data,” he says. “Treasurers should be armed with complete visibility into their cash flow and balance sheet exposures. They should know the bottom-line effects of different currency scenarios. And they should be able to precisely measure the protection offered by both natural and derivative hedging.”
“To do this well, treasury systems should have application programming interfaces (APIs) in place to fully integrate their treasury and risk management processes with their enterprise resource planning (ERPs), market data platforms and trading portals,” he adds. “It is important to make these workflows streamlined and automated.”
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