FX & Currency Hedging Policy Review

The quick answer was that few, if any, participants are reviewing their policies for this reason. Several are indeed reviewing their policies, but this is part of an ongoing cycle, under which most people revisit their policies regularly, to make sure they are still appropriate. There is consensus that a hedging policy, once decided, should be consistently followed – though many of the policies described allow for some degree of judgment around a central approach.

For the rest, the discussion below is one of our more difficult reads, but maybe more worthwhile for that. It is long and complex: I will not try to cover all the points. The policies implemented show a lot of variety:

• Some hedge future cash flows, while some hedge balance sheet, and some hedge both.
• It is important to be clear about the objectives of hedging. These varied amongst participants. There is a complex relationship between budgets and hedging.
• Most participants are looking at options, though not many are using them, mostly due to cost.
• Especially for balance sheet hedges, most participants (but not all!) hedged irrespective of cost – though there are always exceptions, especially for very expensive currencies, such as the Argentine peso.
• Most businesses accept that prices need to be adjusted to cover currency variations, and hedging simply buys time for this to happen.
• Some participants sell from offshore in the HQ currency. When that appreciates, the products become less affordable to the customers, and business volume decreases. This is accepted.
• For cash flow hedging, forecast accuracy is an issue – people often layer hedges over a period of time to counter this.
• Intercompany loans cause issues – this led into a general discussion about the cost of funding in emerging market currencies, which is generally high. Hedging translates the high interest cost into a high hedging cost, which may, or may not be borne by the operating units. Interestingly, a common solution is to fund with equity – companies do not necessarily charge the cost of equity to the units.
• There was a general tendency amongst participants for hedging to be executed centrally, following group policies, though there are cases where it is done locally, and the business units decide on hedging.
• Linked to this is the question of whether the impact of currency fluctuations is viewed as the responsibility of the operating units or the HQ treasury team for measurement purposes. There are a variety of different approaches.
• Some participants are trying to take a holistic view of all their currency exposures: some local transactions in different jurisdictions can offset each other from a group point of view.
• In turn, this requires a consideration of how the hedges are reflected in accounting, and how they impact local taxation and balance sheets.
• Accounting issues are frequently raised.

Bottom line: currency is a complex topic, which has to be managed. There are many different views and approaches, and different answers will be appropriate for different businesses and different situations. But there are constants, notably the need to have a policy, and to follow that policy – and revisit all policies from time to time. In any case, good management of currency is essential to manage profitability and reduce earnings volatility.