Solving the Conundrum
With more and more businesses operating internationally, FX risk management continues to be one of the most vital treasury tasks. After all, failure to correctly monitor and mitigate potential currency-related pitfalls may cause significant headaches for treasurers, senior management, and shareholders. Despite these challenges, there are proactive steps that treasurers could take today to get a better handle on their currency exposures – from automating FX workflows around cross-border payments to building a flexible hedging policy.
A sizeable percentage of companies’ FX exposures arise from the fact that they’re paying and receiving funds to or from overseas, a trend that is only set to grow. The Bank of England, for example, estimates that the value of cross-border payments will rise to $250tr. by 2027 – driven in no small part by the boom in e-commerce (see box 1). Under the surface of this growth, however, multinational corporates are contending with currency volatility that is drastically affecting the bottom line, with one report finding the global impact of recent FX fluctuations to be more than $64bn in Q3 2022.
BOX 1: E-Commerce Catalyses the Focus on Transactional FX
One critical development as a result of the Covid-19 pandemic was the importance of firms being able to shift their business to utilise online as a sales channel. Companies that previously did not have the scale to be international or have a global supply chain now can, thanks to digitalisation. While this is fantastic for business, it brings an element of FX risk that may not have been considered before.
“E-commerce definitely impacts the likelihood of increased cross-border transactions and needing to pay out and receive monies in different currencies that a company has not dealt with before,” highlights Amanda Lovewell, Head of Transaction Services Account Management, NatWest. “As a company grows its online channel, the transactional FX in the business will grow with it. Treasurers must understand what that is and how they’re hedging or optimising it.”