by Jennifer Powers, Americas Region Treasury Manager, UPS
As the world’s largest package delivery company, distributing 15 million parcels and serving almost 8 million customers in more than 200 countries every day, UPS’ two most significant financial exposures are foreign exchange risk and commodity risk. As the business continues to expand overseas, our non-USD revenues continue to grow, so our foreign exchange hedging requirements also increase. Meanwhile, the nature of our business makes us a major user of fuel for both our aircraft fleet and our road vehicles, so we have a substantial and ongoing commodity exposure. Although we do hedge our interest rate to some degree, we have relatively little debt. As our business is closely tied to the economy, it is generally preferable for interest payments to be floating rate, so interest payments are highest when revenues are strongest.
UPS’ hedging philosophy
Our risk management approach at UPS is conservative, so we aim to hedge 100% of our risk, although this is not always feasible in practice. On occasion, we seek to lower our premium expense, but we will not compromise our risk management objectives.
Our policy is to use options almost exclusively, as we value the flexibility they offer.
Consequently, we adopt a fairly conventional approach to our FX hedging. When hedging foreign exchange, for example, our International F&A Group first sets a budget rate based on the forward curve, from which it derives its P&L for the year. The exposure and budget rate information are passed to treasury to recommend hedges and advise on the cost of them, the aim being to protect the budget rate. At that point treasury works with International F&A and the CFO to determine the best course of action. Once a decision is made treasury is responsible for executing the hedges.