Sharing Trade Secrets: Effective FX Risk Management in 2020

As the C-suite continues to seek to understand the potential impact of foreign exchange (FX) volatility on earnings, executives are increasingly looking to the treasurer to limit the negative effects of FX risk on the business. How, then, can treasurers revamp their hedging approaches in 2020 to help meet these goals and add value to the business?

Managing FX risk remains one of treasurers’ highest priorities. Although markets are not necessarily unusually volatile at present, treasurers need to remain aware of ongoing geopolitical uncertainty. Many treasurers must also manage exposure to a wider range of currencies as their international growth continues.

As outlined in the 2019-2020 Journeys to Treasury report produced by BNP Paribas, the EACT, PwC and SAP, these challenges are all too familiar to Jeff Hawkins, Group Treasurer of Fisher & Paykel Healthcare (F&P). Headquartered in New Zealand, F&P specialises in respiratory and acute care as well as the treatment of obstructive sleep apnoea – and sells into more than 120 countries worldwide. With 99% of sales made internationally, managing foreign exchange (FX) risk is a major treasury priority.

Since 2001 Hawkins and his team have worked closely with PwC to develop a highly effective FX risk management policy and approach, incorporating sophisticated financial modelling. One of the major FX challenges the company faces is the volatility of the NZD against other currencies such as the USD appreciating from as low as USD$0.3800 to as high as USD$0.8800, and typically moving well in excess of a 15% annual average range.

To mitigate the effects of this volatility, F&P has taken a detailed and strategic approach to FX risk management. This includes periodically hedging FX out to five years, which is significantly longer than other companies in most cases. “To achieve this, we have developed a robust treasury policy framework, supported with a sophisticated financial stress testing modelling tool to help identify and evaluate hedging alternatives. Proactive ongoing management is another cornerstone of our approach,” says Hawkins.

Alongside the policy, which covers short- to medium-term hedging (up to two years) and longer-term hedging (two to five years), F&P has also revamped its systems infrastructure. “Any effective approach to hedging relies on robust and reliable exposure information, and the ability to execute and manage hedging instruments accurately and efficiently. We have implemented a new sales forecasting solution, which provides us with a robust 12-month rolling sales and cash flow forecast. We also have a dedicated treasury and risk management system, and purpose-built spreadsheets for certain specialist calculations,” Hawkins notes.

Another tip Hawkins offers to those looking to keep a firmer handle on FX risk in the future is to manage expectations by consulting with, and seeking consensus from, the senior management team and Board. Additional FX reporting can also help to build confidence with the C-suite, he believes. “Managing external expectations has also been very important. We provide complete visibility over our FX gains and losses, and the effect of our hedging activities. For example, we provide our annual conversion rate in our financial statements, which is unusual, but gives investors greater confidence.”

In addition, measurement of the value of the hedging policy is critical. F&P therefore performs frequent stress testing to evaluate the impact of FX on the company’s earnings and balance sheet. The capital structure has also been reviewed as a result.

To stay on course with its FX risk management strategy in 2020, F&P will continue to develop its treasury policy, strategy and operations, such as exploring the potential to use additional functionality in its treasury and risk management system. Treasury will also be bringing in new currencies into the risk analysis model and continue to evaluate developments in FX dealing platforms.

An additional task for the small treasury team will be working in conjunction with the financial reporting team to look at potential treasury structures and organisational models for the future. This, Hawkins concludes, will help to ensure “treasury can continue to serve and add value to the corporation as a whole”. 

Discover more tips on managing FX risk, including alternatives to traditional hedging strategies, by downloading the full report at
www.journeystotreasury.com today.