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The Resource for the Global Finance Profession

AFP Releases CTC Guide on FX Risk Management

  • By Ira Apfel
  • Published: 2012-09-11

Even the most sophisticated, long-term hedging programs have been buffeted by the incredible uncertainty in currency markets over the last few years—particularly the euro. That’s led many corporates to revisit their hedging programs—and others to consider starting one.

With these hedging realities in mind, AFP has published the CTC Guide on FX Risk Management by Exchange columnist Nilly Essaides. “One of the areas I am going to cover is exposure identification,” she said. “I think that the leading companies are the ones that are spending the time on identifying their exposures first before putting a program in place. Also, a theme that will frame the report is that the sort of program companies implement is largely driven by the context of their business, regulatory environment, investor and creditor expectations and whether they are private or public.”

A veteran journalist and consultant with more than 20 years’ experience observing the foreign currency business, Essaides interviewed large multinationals headquartered across the globe to learn their hedging best practices and challenges they face. In doing so, she found the most sophisticated trying to account for risks as far down the supply chain as they could go. Meanwhile, those MNCs that do not hedge either are learning to cope with the consequences or start hedging. “What are the elements of a good hedging program? What are the metrics? I think that the leading companies are the ones that are spending the time on identifying their exposures first, before putting a program in place,” she said.

In interviewing many companies, Essaides found a spectrum of hedging philosophies. “A very few programs—and only among private firms—some may describe as speculative. Most are very ‘autopilot’ programs, where a certain percentage of risk is hedged every period without any value-add,” she said. “There are pros and cons to both approaches.”

Essaides sees as a best practice companies that match their hedging programs to the timing and type of business exposures they face, and allow treasury some discretion in the timing, hedge coverage ratio and instruments of choice.

Besides best practices, Essaides notes several hedging trends. “We’re seeing a trend toward more coordinated hedging programs with the firm’s FP&A department, so subsidiaries need to be more accurate in their projections,” she said.

To download the CTC Guide on FX Risk Management, click here.

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All rights reserved.

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