Treasury Management Internation Logo
Cash & Liquidity Management
Published  11 MIN READ
Please note: this article is over 13 years old. If you feel this article is inaccurate or contains errors get in touch here. Many thanks, TMI

A Methodology for Combating Currency Volatility Madness

by Corey Edens, Chief Operating Officer, FiREapps

In today’s global economy, the stakes for treasurers trying to protect the value of their organizations from foreign currency volatility have never been higher. The world is getting flatter, as Thomas Friedman suggested, leading to increased globalization – but currency markets have only become choppier. With globalization leading to a projected rise in daily corporate FX volume to $1 trillion by 2010, currency volatility is expected to ride the same wave, rising from 10% in 2007 to 13.9% in 2010, according to the British Bankers Association. While market forces have converged to make foreign exchange exposure management more critical than ever, FAS and IAS compliance have added additional levels or scrutiny to the process, and an additional burden in terms of time and effort. As a recent wave of financial restatements in the US suggests, this scrutiny is unlikely to go away any time soon. In 2000, just over 100 US companies were forced to restate earnings; that number is projected to nearly triple, rising above 300 by 2010.

The world is getting flatter, as Thomas Friedman suggested, leading to increased globalization – but currency markets have only become choppier.

All these factors have converged to make managing foreign currency volatility a critical issue for companies today, according to Lawrence Lanza, Vice President and Treasurer for Kennametal. His company has experienced the impacts of those trends first hand.

“Historically, we would see relatively modest movement in our major currencies,” said Lanza. “But in the last year or two significantly greater monthly exchange rate volatility, combined with our geographic diversification strategy, has highlighted the importance of maintaining a robust FX exposure management program. Kennametal already devotes substantial resources to foreign exchange exposure management. The current environment only validates our commitment to understanding and effectively managing the potential risks inherent in foreign currency volatility.”