2 most common financial risks faced by a company

| 16-6-2017 | Victor Macrae | treasuryXL |

You might visit this site, being a treasury professional with years of experience in the field. However you could also be a student or a businessman wanting to know more details on the subject, or a reader in general, eager to learn something new. The ‘Treasury for non-treasurers’ series is for readers who want to understand what treasury is all about. From our expert Victor Macrae we received another article on risk management, of which we thought that it adds some extra aspects to the earlier article on riskmanagement. 

An important task of a treasurer is to fully understand the financial risks that impact the firm. Two risks faced by most companies are interest rate risk and foreign exchange risk. Both risks can negatively impact the firm’s financial statements and can ultimately even lead to bankruptcy!

Interest rate risk

Interest rate risk originates from interest bearing liabilities. Most firms have loans. In the case the interest rate is variable, the interest paid varies according to an agreed market rate, such as Euribor or Libor. The risk is that the market rate will increase to a level where the firm is not able to pay its interest payments any more. In that case the firm is in default and theoretically the loan provider can request full loan redemption. In practice the loan provider is now in charge and will increase the margins on the loan as a result of the higher counterparty risk and also other charges such as fees of lawyers will be due. In order to mitigate interest rate risk a firm can use fixed rate loans or use variable rate loans in combination with interest rate derivatives such as interest rate swaps or options.

Foreign exchange risk

Foreign exchange risk occurs when a firm has subsidiaries abroad or when it transacts in a foreign currency. Suppose a firm with the euro as home currency sells products in Japanese Yen (JPY). Payment is due in three months’ time. If the JPY has weakened against the euro with 20% when the payment is due after three months, the revenues in euro are 20% lower. If the margin on the sales was 15%, then the negative foreign exchange rate change has led to a loss of 5%. Foreign exchange rate risk can be mitigated by various means, such a moving production to countries where the firm sell its products in order to match the currency of cash in- and outflows. Furthermore, derivatives such as forwards or options can be used to mitigate foreign exchange risk.

3 steps

The first step in managing interest rate risk and foreign exchange risk is to examine how the firm is exposed to these risks. The second step is to measure the impact of the volatility of interest and currency rates to which the firm is exposed on its financial statements. In the third step, if the effects are serious, the treasurer should consider which of the available options for risk mitigation best suits the firm.

Victor Macrae



Victor Macrae

Owner of Macrae Finance




Waarom ongevraagde biedingen waardevol zijn

| 17-3-2017 | Victor Macrae |


Unilever en Akzo Nobel hebben een resoluut ‘nee’ uitgesproken tegen de ongevraagde biedingen van buitenlandse opkopers. Publiek en overheid hebben verontwaardigd gereageerd over verkwanseling van het Nederlandse erfgoed. Maar de ongewenste avances hebben een groot voordeel: de door de acquisitiekandidaten voor de toekomst geplande strategie wordt nu versneld uitgevoerd. Hierdoor wordt de waarde die in de bedrijven zit al eerder ontsloten.


Unilever heeft veel geïnvesteerd in haar merken en in duurzaamheid. Verkoop van de onderneming stond nooit ter discussie. Sterker, Unilever is zelf een bedreven bedrijven-opkoper. Hiermee is Unilever echter ongewild een ideale overnameprooi. Door de stabiele cash flow kan een overname met goedkoop vreemd vermogen worden gefinancierd. Vervolgens kan flink in de kosten worden gesneden. Beide krikt het rendement op eigen vermogen flink op.

Rendementsverbetering in plaats van alleen duurzaamheid

Er was al enige tijd gemor onder Angelsaksische aandeelhouders dat Unilever teveel aandacht zou besteden aan duurzaamheid in plaats van aan het verhogen van aandeelhouderswaarde. Het bestuur van Unilever heeft na de bieding aangekondigd haar focus te verleggen naar rendementsverbetering. Akzo Nobel reageerde met de mededeling dat het overweegt de divisie Specialty Chemicals van de hand te doen. Volgens de Raad van Bestuur van Akzo Nobel lag deze stap al in de planning, maar is het door de omstandigheden versneld.

Stap voorwaarts

Zowel Unilever als Akzo Nobel heeft als reactie op de ongewenste avances een sprong voorwaarts gemaakt door zelf het heft in handen te houden en de toekomstige strategie nu al versneld uit te voeren. De aandeelhouders kunnen deze stap duidelijk waarderen: beide aandelen werden na de toelichting van de RvB beloond met een flinke koersstijging. Wellicht een hint voor andere Nederlandse ondernemingen: als u een versnelling in de uitvoering van uw eigen strategie te weeg wil brengen, doe dan net alsof u een ongevraagd overnamebod heeft ontvangen.

Victor Macrae


Victor Macrae

Owner of Macrae Finance

Meer artikelen van deze auteur:

Is this the solution to solving the derivatives mis-selling issue?

Fx volatility creates opportunities


FX volatility creates opportunities

currencies| 18-10-2016 | Victor Macrae |

The British pound has strongly decreased in value against other major currencies such as the US dollar and the euro. Such FX movements can negatively impact firms’ financial statements and destroy firm value. On the other hand, they can also create opportunities. I would like to demonstrate this on the basis of a real case of a European based industrial firm which has the euro as functional currency. We’ll discuss two scenarios.

First, some time ago the firm was negotiating a takeover of a British firm. In anticipation of the M&A transaction it purchased British pounds against euros. However, the deal was unexpectedly cancelled. As a result the firm had to sell the pounds again. Luckily, the pound had strengthened against the euro in the meantime and the firm ‘gained’ millions due to the failed acquisition. This could however easily have been a ‘loss’ in case of a weakening of the pound. The ‘no FX strategy’ was in the firm’s favour this time, but I wouldn’t bet on it.
If you are thinking about a takeover in the UK (or any other country where the local currency is under pressure) it is wise to consider multiple FX hedging strategies. For instance, using options for these type of transactions not only provides you with a way out if the acquisition is not closed as an option gives you the right but not the obligation to purchase the FX. Furthermore, when the payment is due it also gives you the opportunity to buy the currency at the option’s strike price or at the lower prevailing market rate if the case.

Second, a characteristic of this industrial firm is that it is very dominant in its core markets. Due to this position, the firm predominantly sells its products in euro, also to customers with a different home currency. While it may seem that there is no FX risk, this strategy has led to currency issues, for instance in the Russian market. Due to the weakening of the Russian rouble against the euro, the firm’s products have become more expensive up to a point where sales in Russia have nearly ceased to exist. Russian customers cannot afford to pay the euro prices and demand pricing in roubles or a discount on the euro price.
This is an example where a firm’s exchange rate policy influences its core business activities. A solution could be to move production to Russia, and possibly to produce for other regions as well, although this has consequences far beyond the FX issue which have to be taken into account.

Both examples show that FX volatility can create opportunities. FX risk management should support the core activities of a firm and not the other way around. But if creative FX management helps create firm value, why not benefit?


Victor Macrae


Victor Macrae

Owner of Macrae Finance



McKinsey beats Warren Buffett

| 10-06-2016 | Victor Macrae |

mcckinseywarrenbuffetAccording to investigations made by the Financial Times, McKinsey Investment Office (MIO), a formerly unknown investment daughter of the top tier strategy consulting firm, has shown a stunning performance over a long period of time. MIO holds $9.5 billion in assets from current and former McKinsey partners, half of which is invested for pension plans, the other half for wealth management. MIO acts like a hedge fund and its policy is to generate equity-like returns over a longer period of time, however with lower risk.

Over the last twenty-five years MIO’s top fund achieved positive returns every year except for the year 2008, in the middle of the financial crisis when most were losing out! According to Hedge Fund Research, the average similar fund lost money in five years over the same period. I guess even Warren Buffett would be pleased with these results. By the way, in 2014 the top fund generated a 14 per cent return against a 3 per cent average return for hedge funds.

MIO was set up thirty years ago and its existence was until recently only known to a small circle of McKinsey partners. Its investment activities are set apart from McKinsey’s consulting business. MIO does not invest directly in quoted securities, but uses external hedge funds and private equity funds, which are considered alternative investments. This alternative asset class generally performs well over a longer period of time and it is not exposed to market volatility such as Buffett’s Berkshire Hathaway shares.

Now that MIO’s ‘cover is blown’ and if it survives the scrutiny of regulators regarding the question whether there is a conflict of interest due to possible information advantages, I suggest that MIO becomes an investment fund open to the public. I would definitely consider investing myself. What do you think?

Victor Macrae


Victor Macrae

Owner of Macrae Finance





Is this the solution to solving the derivatives mis-selling issue?

12-05-2016 | by Victor Macrae |

EuroRecently the Dutch Ministry of Finance appointed three independent experts to solve the long-lasting issue of derivatives mis-selling in the Netherlands. This is important for both firms and banks as the dispute puts severe pressure on their relationship. Moreover, judges are reaching more and more verdicts in favour of SME’s. In several cases interest rate swap transactions were declared void and the firm was compensated for its losses. Therefore the stakes are high. Is this last step permanently going to solve the issue?

The derivatives mis-selling problem originates from the fact that banks have been selling interest rate swaps to SME’s as an alternative to fixed rate loans. If market interest rates would not have dramatically decreased to unprecedented lows, there might have been no issue at all! But the reality is that buyers of interest rate swaps face various problems that they were apparently not aware of when signing the contract. For instance, in contrast to fixed rate loans, a bank can increase the interest margin when it deems a higher counterparty risk. Furthermore, when a firm wants to repay the underlying loan, it will also have to pay a possible negative market value of the swap. Also, a swap’s negative market value can decrease the firm’s access to liquidity.

MiFID strongly protects non-professionals

A key fact in this issue is that SME’s are deemed to be non-professional investors according to MiFID, a powerful EU directive that protects customers that purchase financial instruments. When selling interest rate swaps to non-professionals, banks should in advance inform them whether it acts as an advisor or as product seller. Furthermore, the bank should upfront provide sufficient information about all risks involved. Last but not least, banks should check that the non-professional investor understands the proposition and that the product is in the best interest of the customer.

Overarching solution

The Dutch financial conduct authority AFM first asked the banks to review their files of derivatives sales to SME’s and to pay compensation if necessary. Thereafter, the AFM concluded that the reviews were not ‘in the best interest of the customers’ and demanded that banks do it all over again. Recently the Dutch Minister of Finance intervened because he was unhappy with this process. As a consequence, to solve the issue once and for all the Ministry of Finance appointed three independent experts. I’m pleased with the idea of appointing three ‘outsiders’ as it makes it easier to reach a sound overall solution for all parties involved. SME’s would be fairly compensated and further financial and reputational damage of banks would be limited.

Disturbing signals

What bothers me is the fact that in the procedure set up by the AFM the banks will create an overall recovery plan together with the independent experts. This gives far too much power to the banks and undermines the independency of the experts! Having said that, the Minister of Finance has already softened this statement of the AFM. We will see how it works in practice. As an alternative SME’s can always go to court as judges have reached verdicts that are beneficial to them…

Victor Macrae


Victor Macrae

Owner of Macrae Finance