While treasury and Hollywood often seem to be worlds apart, it was Helen Mirren who said, “Fear sometimes stops you from doing stupid things. But it can also stop you from doing creative or exciting or experimental things”, a comment that is as relevant to a treasurer’s day job as walking the red carpet. As one of the world’s greatest actors, you take risks on the script you pick, the director you work with and most importantly of all, your choice of red carpet footwear. Taking informed risks on the first two of these is how you move from rep theatre in a small market town to the West End, Broadway or Hollywood. Taking a risk on the third and hobbling through a première or breaking an ankle is avoidable and leads to all the wrong sort of headlines.
So risk is neither unfamiliar nor always undesirable: however, in each instance, it needs to be treated appropriately: take, mitigate or manage. A company will always take the specific risks related to their business, whatever their industry, as this is where growth and competitive advantage can accrue. It will mitigate risks such as operational risk, where there is no upside. Most market risks, including FX, fall into a third category, where, like the risk of vertiginous heels, risks can create serial pain, but also serial gain, so they need to be managed correctly to limit downside risk without eliminating upside potential.
The scale of the challenge
Managing foreign exchange (FX) risk is core to treasury’s responsibilities, but the scale of risk and therefore potential impact on earnings, continues to increase as corporations extend their international reach whilst buffeted by high levels of market volatility. Although the nature of FX risk remains universal, corporate skills and attitudes, together with the market and regulatory environment, have changed significantly over recent years. As Dipak Khot, Thought Leadership, Corporate Risk Solutions, UK & CEEMEA, HSBC describes,
“Historically, risk management looked quite different to the way it appears today. In the past, treasury management was largely confined within local boundaries, with each external or overseas unit responsible for managing its own market risk. Secondly, the treasury and risk policy was often static, and not reviewed regularly. This policy was largely focused on market risks that the treasurer understood best, such as FX, interest rate and commodity risk, and mostly these tended to be managed in isolation rather than under one umbrella. Even within FX, risks arising from different currencies were managed separately rather than as a basket risk. Amongst our clients, for instance, only a few, more sophisticated corporate treasuries managed a wider set of risks such as credit, inflation, correlation etc., and expertise in these areas was relatively limited in some organisations.”