After performing through some volatile years, corporate currency-risk managers earn growing respect.
The losses for corporations from unexpected moves in exchange rates can be significant, even during times of relative market stability. Corporations in the US and Europe reported $7.4 billion of negative impact on their financial results in the second quarter of 2017 due to foreign exchange, according to FiREapps, which helps companies reduce FX risk and costs.
Multinational companies have learned a costly lesson in recent years about the importance of managing currency risk. The Russian ruble tumbled 50% against the dollar in 2014 when oil prices collapsed. The euro dropped 30% against the Swiss franc in 2015 after the Swiss National Bank abandoned the euro peg. In June 2016, the British pound sank to its lowest level in more than 30 years after Britain voted to leave the European Union. In November 2016, Egypt floated its pound, which quickly lost 48% of its value. The election of Donald Trump and a Republican-controlled US Congress caused major volatility in the Mexican peso.
| AWARDS METHODOLOGY |
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Global Finance’s criteria for the corporate FX awards are similar to those for its FX service providers: a mix of objective and subjective. We consider whether the company has clearly defined risk-management policies, how it handles currency-related crises, whether it accurately measures its FX exposure and controls the cost of hedging.Our criteria also include subjective factors such as customer service and technology innovations, using input from industry analysts, surveys, corporate executives, consultants and technology experts. Decisions are informed by provider submissions. |
“Foreign-exchange risk management is a team sport,” says Amol Dhargalkar, managing director of Chatham Financial’s global corporate sector. “And it’s not just the treasury team that is involved. The CFO or treasurer needs to be a part of the conversation with business managers themselves and to use ERP systems to gain better access to the entire organization.”
Chatham Financial, based in Kennett Square, Pennsylvania, serves more than 1,800 clients worldwide in mitigating financial risks associated with interest rates, foreign currency and commodity exposures. Although many small and medium-size companies do not actively manage FX risk, believing that it is too difficult or expensive, Dhargalkar says this does not have to be the case.
“Smaller companies have some advantages,” he says. “They have more-concentrated exposures, and they have an easier time in gaining access to data.”
The role of FX-risk manager also enables CFOs or treasurers to play a more strategic role in the corporation. “As the CFO becomes more embedded in the business, this is a significant positive,” Dhargalkar says. “Risk managers also tend to gain a higher-visibility position.” As they interact with the CEO and the board, risk managers need to insist that the hedging program be in writing, Dhargalkar says, and locked in when the cycle changes, to mitigate risk of reactively buying high and selling low.
With these Corporate FX Awards,Global Financehonors companies that are expertly managing their currency exposures, with an eye to minimizing losses—not gaining profits—from currency-trading activities. “We truly appreciate the support provided by our core banks and their systems to enhance our visibility of FX currency risks and improve our hedging capabilities,” says Christian Idczak-Descat, senior director of Treasury, EMEA, for winner United Technologies. “We look forward to improved cooperation with our banks and their further enhancements to existing systems.” These are the companies that are best positioned to weather the next era of transformational change in finance.
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GLOBAL AWARDS |
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World’s Best Corporation For FX Management |
Alphabet |
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Best Corporation For Use Of Currency Hedging |
United Technologies |
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Best Corporation For Use Of Foreign Exchange Options |
Toyota Motor |
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Best Corporation For Use Of Foreign Exchange Forwards |
Airbus |
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REGIONAL AWARDS | FX Management |
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North America |
Apple |
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Latin America |
Fibria |
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Western Europe |
Siemens |
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Central & Eastern Europe |
PKN Orlen |
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Middle East |
SABIC |
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Africa |
Sasol |
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Asia-Pacific |
Reliance Industries |
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REGIONAL AWARDS | FX Innovation |
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North America |
Ford Motors |
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Latin America |
Femsa |
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Western Europe |
Philips |
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Central & Eastern Europe |
Grupa Azoty |
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Middle East |
Aramex |
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Africa |
GoldFields |
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Asia-Pacific |
Hoa Phat Group |
GLOBAL WINNERS
BEST CORPORATION FOR FX MANAGEMENT
Alphabet
Google parent Alphabet is a net receiver of foreign currencies and therefore benefits from a weaker dollar. In the fourth quarter of last year, Alphabet began using foreign-exchange forward contracts, in addition to its existing FX-options contracts, to protect its forecast dollar-equivalent earnings from changes in currency rates. The company’s cash flow hedging contracts reduce but do not eliminate FX risk. Alphabet also uses FX-forward contracts to offset the FX risk on its assets and liabilities denominated in currencies other than the local currency of the subsidiary. As of December 31, 2016, the company’s most significant currency exposures were the British pound, the euro and the Japanese yen.
BEST CORPORATION FOR USE OF CURRENCY HEDGING
United Technologies
United Technologies, based in Farmington, Connecticut, is a multinational conglomerate that manufactures a wide range of products from jet engines to air conditioners. At the end of last year, the company had a notional amount of $18.3 billion of contracts hedging FX transactions on a four-quarter, moving-average basis. That was up from $15.6 billion at the end of 2015. The company says its risk-management tools involve little complexity and are not used for trading or speculation. United Technologies actively manages its FX exposures at the operating-unit level. Exposures that cannot be offset within an operating unit are hedged with FX derivatives.
BEST CORPORATION FOR USE OF FX OPTIONS
Toyota Motor
Toyota Motor Company, the world’s largest automaker, has exposure in all major currencies. The company has 53 overseas manufacturing companies in 28 countries. In the third quarter of 2017, a period in which the yen was relatively steady, the effect of foreign-exchange-rate movements added more than $1 billion to the company’s earnings. Toyota uses derivative financial instruments, including forward contracts and FX options, to manage its currency exposure. The use of options gives Toyota the right, but not the obligation, to purchase or sell a specific amount of foreign currency at a fixed rate on a future date.
BEST CORPORATION FOR USE OF FX FORWARDS
Airbus
With more than half of its revenues denominated in dollars and its manufacturing costs mainly in euros, and to a lesser extent in British pounds, Airbus notched its second win for using hedging strategies to minimize the impact on earnings from volatility in the dollar. The company manages a long-term hedge portfolio covering its net exposure to dollar sales, mainly from the activities of Airbus Commercial Aircraft, but also from its helicopters, defense and space divisions. It typically implements FX-forward contracts to lock in the rate at which future receivables are converted into euros.
REGIONAL WINNERS
BEST CORPORATIONS FOR FX MANAGEMENT
NORTH AMERICA
Apple
Apple generates two-thirds of its revenue outside the US and has been a very active hedger of its foreign-currency exposure since 2014. To help protect gross margins from currency fluctuations, Apple subsidiaries whose functional currency is the dollar typically hedge a portion of forecast foreign-currency revenue. Subsidiaries whose functional currency is not the dollar (and that sell products in local currency) may hedge a portion of forecast inventory purchases not denominated in the subsidiary’s local currency. To help protect the net investment in a foreign operation, Apple may use forwards and options—or nonderivative financial instruments, such as its foreign-currency-denominated debt—as economic hedges.
LATIN AMERICA
Fibria
Brazilian pulp and paper company Fibria exports the bulk of its production. Some 36% of the company’s revenue comes from Europe, with 32% from Asia, 22% from North America and 10% from Latin America. Fibria’s main FX risk is appreciation of the Brazilian real versus the dollar, since its production costs are mainly in reais and pulp is priced in dollars. The company prioritizes sources of funds in the same currency as its cash generation to create a natural currency hedge for its cash flow.
WESTERN EUROPE
Siemens
German conglomerate Siemens, Europe’s largest industrial manufacturing company, is active in more than 200 countries. The company’s currency guidelines require a hedge ratio of 75% to 100% for operating entities. Only transaction risk is hedged using FX spot, forward, option and swap instruments. Siemens’s treasury manages liquidity in 30 currencies on a daily basis, with about 75% of the volume in short-term FX swaps. Options are used mainly at the request of internal customers to buffer short-term volatility risk for existing or planned FX positions or for project business.
CENTRAL & EASTERN EUROPE
PKN Orlen
PKN Orlen, which operates refineries and service stations with convenience stores throughout Poland, the Czech Republic, Germany and Lithuania, takes this prize for the second year in a row. The company’s risk related to currency exposure from cash flow is actively hedged using currency futures. Selected elements of balance-sheet exposure to currency risk are also hedged. Currency risk related to capital spending is hedged using forward contracts. A financial-risk committee manages the company’s currency and interest-rate risks, as well as emissions allowances, working capital, liquidity and credit risks.
MIDDLE EAST
SABIC
Saudi Arabia’s SABIC is one of the world’s largest petrochemical companies with 100 operating companies in more than 50 countries. The company’s multibillion dollar currency exposure is identified and managed using an enterprise resource planning system for derivatives, ensuring efficient and compliant end-to-end processing of transactions. The system also ensures that risks are managed within parameters determined by the company. SABIC is active in polymers and other chemicals, fertilizers and metals. It has also implemented commodity-risk management policies for its global businesses.
AFRICA
Sasol
South African energy and chemicals group Sasol is vulnerable to changes in the dollar-rand exchange rate. Sasol entered into foreign-exchange hedges last year with a notional amount of $4 billion, an average of about $1 billion per quarter. The hedges were completed using zero-cost collar instruments. This short-term options strategy offsets the volatility risk through the purchase of a cap and floor for the price of a derivative. The hedges provided Sasol with some cash flow and balance-sheet protection.
ASIA-PACIFIC
Reliance Industries
India’s biggest private-sector firm, Reliance Industries is known for its refinery and petrochemical businesses; but it has also created the country’s biggest telecommunications network, Jio—biggest in the world for data traffic. The company raised $2.5 billion in overseas markets last year to refinance Jio’s loans. Not only did Reliance take advantage of lower interest rates than were available in the domestic market, but the loans also created a natural hedge for the company’s export income. Reliance is India’s largest exporter.
BEST CORPORATIONS FOR FX INNOVATION
NORTH AMERICA
Ford Motor
Ford Motor Company’s recent consolidation of its currency and interest-rate hedging activity into a single treasury risk-management department is paying off. Not only is this arrangement more efficient, but it also enables the Detroit automaker to better understand risk relationships as they relate to the macroeconomic environment. Ford has lowered the cost of its hedging operations as a result. The company, which has two UK manufacturing sites, made a record $1.2 billion profit in Europe last year, as it benefited from hedges against a decline in the British pound.
LATIN AMERICA
FEMSA
Femsa deals proactively with the multiple foreign-exchange exposures its global operations entail. The Mexican conglomerate reduced its net dollar exposure to zero last year, and its net debt is now denominated in local currencies to mitigate the effect of FX volatility. Bolstered by its partnership with Coca-Cola, Femsa actively hedges its currency and raw-material positions. The company has 16,000 Oxxo convenience stores in Mexico and Colombia that provide about half of its earnings. Femsa also holds a 20% equity stake in Heineken, which operates in more than 70 countries.
WESTERN EUROPE
Philips
Dutch multinational Philips developed an FX footprint model showing the sensitivity of the company’s earnings to currency movements. Philips, which is active in more than 100 countries and processes more than $100 billion in payments every year, hedges its currency risk at the group level. The new FX policy is designed to make business managers aware of the impact that currency fluctuations have on their performance.
CENTRAL & EASTERN EUROPE
Grupa Azoty
Polish chemical and fertilizer manufacturer Grupa Azoty monitors its current and planned net currency exposures and manages the risk through selective hedging. After taking into account natural hedging, as well as the factoring and discounting of receivables denominated in foreign currencies, Grupa Azoty uses currency forwards to cover up to 80% of the remaining currency exposure of less than six months, and 50% of the remaining exposure up to 12 months. Company policy allows hedges of up to 24 months if they are designed to reduce the effect of currency movements on cash flow.
MIDDLE EAST
Aramex
Dubai-based Aramex, an international express-mail delivery and logistics-services company, is active in 60 countries. A significant portion of the group’s trade payables and all of its foreign-currency receivables are subject to exchange-rate fluctuation. Aramex reduces its currency exposure by maintaining some of its bank balances in foreign currencies in which its trade payables are denominated. This provides an economic hedge. The UAE dirham is pegged to the dollar.
AFRICA
Gold Fields
With a stated objective of protecting cash flow while it funds a new gold-mining project, South Africa–based Gold Fields undertook to hedge both oil against US dollars and the Australian dollar against gold in June 2017. The volume of gold hedged represented approximately 75% of the expected production from the Australia region for the second half of last year.
ASIA-PACIFIC
Hoa Phat Group
The Vietnamese dong has been one of the most stable currencies in Asia this year, but the central bank’s method of calculating a daily central rate has resulted in some unpredictable fluctuations. Hoa Phat Group, a steel and construction machinery manufacturer, carefully calculates the implementation time and terms of payment for import contracts to take FX movements into account. The company optimizes its use of export revenue and uses onshore and offshore credit facilities and derivatives to balance its foreign-currency exposure and minimize risk.
