Managing FX Risk in Turbulent Times: Observations from Citi Treasury Diagnostics
London – Citi today released the latest Risk Management findings from its award-winning benchmarking tool, Citi Treasury Diagnostics (CTD), designed to help companies assess the effectiveness of their treasury, working capital, and risk management practices. The Risk Management findings are based on comprehensive results gathered from a diverse group of large corporates, industries and geographies.
Against the backdrop of today’s challenging operating environment, the report describes the approaches, tools and techniques corporate treasurers are taking to identify and manage their FX exposures. Surprisingly, despite unprecedented recent market conditions, the risk management approach for many corporates has remained largely unchanged from previous years. Many companies continue to leverage traditional strategies, practices, products, tools, and technology to manage their FX risk.
Based on responses, the majority of large corporates have mature FX risk management programs in place covering a large portion of their exposures. However, despite nearly 60% declaring that ‘reducing earnings volatility’ is a key risk management objective, many also report continuing material impacts on their earnings due to FX volatility. Ron Chakravarti, Global Head of Treasury Advisory Group, Citi Treasury & Trade Solutions, said: "It seems likely the year ahead will be one of heightened unpredictability in the currency markets, with further disruption to corporate earnings. Yet, status quo prevails. The big question is: will more multinationals adapt their legacy FX risk management processes and practices to navigate the changing market environment?”
Remarkably, the findings also indicate that most companies do not differentiate between emerging market (EM) and developed market (DM) hedging practices. Sam Hewson, Global Head of FX Risk Management Solutions & Co-Head Western Europe Head of Corporate FX Sales, said: “Many corporates are aware that they need to deploy a different approach between developed and emerging markets, however, their current FX policy remains virtually the same. The challenges in identifying and hedging FX risk have always been around, but as companies continue to further deploy their balance sheets to the emerging markets, corporates need to consider differentiating their currency strategies.”
The report also explores key components of cash management processes, centralization constructs and technology, specifically as they relate to FX risk management. Erik Johnson, Director, CitiFX Global Risk Solutions, said “Our survey highlights the importance of having a well-designed and integrated FX risk management program in place, bolstered by an equally robust technology infrastructure”.