Treasurers On A Wild Ride

Foreign exchange volatility is a major headache for corporates, but with strategic planning it’s possible to enjoy the ride.

Essaides, AFP: Treasurers in the US in particular should consider options as an integral part of a hedging toolkit.

In recent months, volatility has become a regular feature of foreign exchange markets. It is now the constant concern to treasurers of corporates that do business across borders. Unpredictable currency fluctuations irk companies in many ways—increasing risk, raising the cost of doing business, and eventually denting the bottom line. But they can also present unique opportunities, if treasurers have the right tools and keep an open mind.

“This is an issue that continues to be discussed around the world,” says Craig Martin, executive director of the Corporate Treasurers Council of the Association for Financial Professionals (AFP) in the United States. “It’s hard to get treasurers from global companies together and not talk about it.” The US dollar is on the upswing, while emerging markets currencies from South Africa to Brazil, hit by the global economic slowdown and collapsing commodity prices, have been on a roller coaster ride. China’s renminbi is undergoing a process of liberalization, which is making it as unpredictable as ever. The course of the euro and the yen is shrouded in mystery, as their respective central banks experiment with negative interest rates. Even the once-foolproof pound sterling is a less reliable bet than in the past due to Britain’s possible exit from the European Union.

“Foreign exchange fluctuations are obviously a factor for [a global company like] AkzoNobel,” Ton Büchner, CEO of the Dutch multinational, said at a presentation of its annual results in early February. “When it comes to transaction effects, we make use of natural hedging by making a product and selling [it] in the same country, but it’s not possible in all cases to use local raw materials. We don’t hedge the translation effects.”

Hard hit by ever-wider currency swings, even the world’s largest global companies are digging into data to try and squeeze out as much predictive information as possible.

“They have been looking at the correlation between currencies for some time, but now they are studying the correlation between currencies and commodities,” says Martin. This highlights how crucial corporates deem getting a handle on volatility. “It’s so big that even the best of the best are re-examining their programs,” Martin says.

South Africa is one of the countries being battered by the storm of currency fluctuations, and treasurers there have been fighting the crosswinds. “We are shifting to in-country funding where possible, and we are lengthening our hedging tenors and including various different types of hedging instruments,” says Willem Reitsma, group treasurer of Imperial Holdings, a South Africabased group that operates in 31 countries in consumer and industrial logistics and vehicle import, distribution and financing.

“We have also reassessed the use of hard-currency funding at low interest rates in exchange for local currency funding in various countries,” he says, “and we have considered injecting capital into certain countries rather than debt funding, to avoid the income statement effect of weak currencies.”


Bchner, AkzoNobel: Foreign exchange fluctuations are clearly a major issue for global companies.

But how the picture looks depends on where a company sits and what it does. “For an exporter with most of the cost in Mexican pesos, it is an extraordinary time,” says Saúl Villarreal García, CFO and finance director at the Grupo Aeroportuario del Pacífico, in Mexico. “However, if you are in the import business, you should get coverage—in fact, you should have done that already.”

His group is among those that have benefited from the peso’s depreciation. “It has improved our cash flows, and additionally, passenger traffic in some of our airports has increased as international travelers become more willing to visit our destinations.”

Challenges include keeping costs down. “Many suppliers have told us that the price they pay for some of their supplies has significantly increased,” Villarreal García explains. “Therefore we have been renegotiating with them to partially accept the increment [on our part], but no more than 5% of the originally agreed-to cost.”

Gerardo Estrada, corporate finance director of Mexican multinational beverage and retail conglomerate Femsa, says the kind of risk his company runs is operational, “driven by the situation in individual countries.” He offers the examples of Brazil and Venezuela, both countries where Femsa is present and which are coping with significant foreign exchange turbulence. “Once you are there, you cannot avoid it,” Estrada says. “But we never intend to hedge against the country risk; that’s part of our business and our investors know it. What we don’t want to do is increase risk through treasury bets, otherwise it is just like going gambling in Las Vegas.”

According to Rahul Magan, treasurer of EXL Service, a business process solutions specialist in India, volatility isn’t altogether bad.

“It would be wrong to think that rising volatility only makes a mess of things,” he says. “When volatility levels increase, so do opportunities, as long as your corporate has the right risk management framework.” And, he adds, the appropriate mind-set and degree of flexibility: Opportunities are there for the taking, but must be identified first.

Estrada, Femsa: Key markets like Brazil and Venezuela are coping with significant foreign exchange turbulence.

Nilly Essaides, director of practitioner content development at the AFP, believes treasurers in the US in particular should consider options as an integral part of their hedging toolkit. “Today options are mathematically cheaper than forward contracts,” she says. “But management can be reluctant to pay up front even if forward contracts are more expensive in the end.”

We have considered injecting capital into certain countries rather than debt funding, to avoid the income statement effect of weak currencies.

—Willem Reitsma, Imperial Holdings

Essaides also says she is seeing more and more companies deploying a form of rolling hedge program. For example, “instead of hedging outright—for a full three months, six months, one year—they hedge 80% of the next three months, 40% of the next six months, 20% of the next nine months and 10% of the next year,” she explains. “Then as they move closer to every quarter, they layer on more hedges to get to that higher percentage, and what they end up getting is an average hedge rate throughout the year.” This way, a company is always protected, not necessarily at 100% but in keeping with its level of risk tolerance.

Amid the turmoil, treasurers can look to technology for help, particularly now that it has become more affordable. First of all, it’s easier to track exposures. “If you don’t know what your exposures are,” says Essaides, “your hedging program is completely ineffective.” Second, technology can add to the frequency and quality of reporting, improving communication with management and the board. It can also smooth trading wrinkles. “Now it’s very easy to have information on what’s happening anytime anywhere,” says Femsa’s Estrada.

But at the end of the day, notes Villarreal García of Grupo Aeroportuario del Pacífico, technology is only an aid, not an answer.

“Of course, technology helps to [make us] aware of market conditions and tendencies,” he says. “But the treasurer is the ultimate decision-maker, and he should have the knowledge and instinct to make the right decisions.”