by Dipak Khot, Head of FX Solutions EMEA, Stephane Knauf, Global Head of FX & PM Structuring and Marc Tuehl, Global Head of FX Overlay, Global Banking and Markets, HSBC
Corporations across many industries are responding to the current extended period of market volatility and slow growth by refining their international strategy and by redirecting their focus to their core business. This is resulting in many companies contemplating disposal of non-core foreign assets that no longer fit into this strategy and instead considering reducing funding cost by repaying debt, releasing trapped cash, safeguarding consolidated earnings and optimising their balance sheets by expanding in core markets. Treasurers have an important role to play in ensuring the success of such approaches, in particular to maximise the value of these disposals by managing balance sheet translation risk. Amongst treasurers we work with, there has been a widespread view that balance sheet (net investment) risk is an accounting risk, rather than an economic risk, and therefore these risks were excluded from treasury’s hedging strategy.
However, this view is being exposed as a myth due to a direct impact it can have on the value of the asset, and is hence instrumental in creating the liquidity that treasurers need to free up to meet one or more of their key drivers mentioned earlier. Although managing this translation risk can be challenging, there is a range of realistic and potentially viable mechanisms available to do so, together with expert guidance on how best to identify, measure, monitor and manage such risks.