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Strategies for Managing Transactional FX Risks

by Andrew Chamberlain, FX Payments Product Manager, Global Transaction Services EMEA, Bank of America Merrill Lynch 

Global foreign exchange (FX) markets continue to be a study in contrasts, with a calm now settling over the major currencies, while emerging market currencies experience a period of higher volatility.

The dynamic FX landscape has fostered a more sophisticated and comprehensive approach to FX risk on the part of corporate treasurers. For corporations and subsidiaries operating in Europe, the Middle East and Africa (EMEA), the impact of these currency developments is two-fold. On the one hand, the costs associated with production and the repatriation of cash have become more predictable due to reduced volatility in developed currencies. This is enabling many corporates to forecast their FX positions more effectively and take a more comprehensive approach to FX risk management.

For corporations with interests in emerging economies, however, it is a different story. Many corporations had not necessarily expected growth slowdowns to come when they did. Some of these companies are now seeing a negative impact on their overall profits, as the relative values of major and undeveloped currencies continue to affect the repatriation of income from emerging markets into operating currencies, and volatility may also be having an impact on cost of materials or finished goods.

Interestingly, these two opposing trends are driving the same change: an increased focus on FX risk management and a greater need for sophistication in adopting the most appropriate treasury and cash management operating model and tools.

Striving for efficiency through centralisation

Corporate treasury departments use a variety of operating models and FX risk management tools successfully, However, as corporates in EMEA continue to centralise treasury and cash management functions as well as finance and accounts payables, it is important to review and re-evaluate which combination would be the most effective based on a corporate’s current and future FX needs.  A company’s choice of treasury structure will play a role in determining the most appropriate FX tools and techniques.