Risk Management
Published  9 MIN READ

Special FX: Taming Foreign Currency Risks Through Automation and Innovation

There is never a dull day in the treasury profession, especially when volatility is rife in the currency and commodity markets. The flipside of this dynamic environment is the very real threat of financial losses – arising from poor hedging decisions, or outdated practices, policies, and systems. Here, two experts from NatWest share the inside track on how treasurers can better manage FX risks by shaking up legacy processes and old-fashioned thinking, improving data collection through APIs, and embracing automation.

In 2021, there were high-profile, and frankly eye-watering, examples of costly hedging decisions – with some corporates being caught off guard by market movements and geopolitical events, and others pursuing a risky ‘no-hedging’ approach. A large FMCG player, for example, faced a $2.3bn increase in raw material, freight, and FX costs for the fiscal year as a result of its decision not to hedge[1].

Meanwhile, in the first quarter of 2022, treasurers have already experienced some significant challenges in the currency and commodity markets, with the Russian invasion of Ukraine adding complexity. Fabio Madar, Global Head of FX Sales and Structuring, NatWest Markets, explains: “Volatility is certainly high at the moment. But we’ve seen similar choppiness in the currency market during previous crises, so this level of market risk is not new per se.

“Nevertheless, treasurers are also grappling with significant sanctions on Russian entities. In turn, this has led to settlement risk for anything in roubles. This is not normally a huge concern for treasurers as it is typically taken care of by established mechanisms in the market, but suddenly, in February and March 2022, settlement risk became very ‘real’.”