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Thinking the Unthinkable: A new chapter in FX risk management?

by Helen Sanders, Editor

Some weeks ago, I came to the realisation that if I had to start another article with the words ‘the financial crisis’ then I would probably go mad, but on this occasion, I think it is justified and will therefore try to hold on to my sanity for just a little while longer. The theme of this article does indeed start with ‘the financial crisis’ but for once, it is focused on neither liquidity nor credit risk. One of the other implications, but which has received far less attention, has been the impact on the way that corporate treasurers have approached their foreign exchange (FX) risk.

One of the major implications of the crisis has been the increased focus on FX risk and what it means to the business.

The whole concept of risk management has changed unrecognisably over the past two years. The volcanic ash that closed airspace in the UK and much of Europe is an example in point. As treasurer of one of the major airlines told me earlier that week, you model the cash flow (as well as logistical) impact of planes being grounded for 24 or 48 hours, but certainly not for a week. The same applies to FX risk. With unprecedented market volatility, combined with uncertainty of revenues, the way that companies approach FX risk has changed considerably.

Impact of the crisis

With unprecedented volatility in USD rates in particular, one of the major implications of the crisis has been the increased focus on FX risk and what it means to the business. As Anders Aslund, Corporate Risk Advisory, Commerzbank, explains,