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Advice for Treasurers managing FX risks during volatile trading conditions

Joe Rudkin Treasury, Market Insight

Since March, the United Kingdom alongside the rest of the world has been dealing with the impact of the COVID-19 outbreak. All businesses, industries and functions, including those in treasury, have been dealing with challenges not experienced for over a decade.

With expert insight from treasury professionals we are running a series of interviews in which we’ll discuss the challenges being faced, the short and long term implications, the lessons learnt and advice for future similar situations.

A huge thank you to the following for your contribution:

  • Paul Leacy, Interim Group Treasurer at Badoo
  • Martin Walker, Treasury Consultant with experience in leading treasury functions across a range of sectors 
  • Catherine Porter, Chair of the Membership Advisory Panel at the ACT
  • Nick Axton, Group Treasurer at Travelport

 

In the final interview of the series we asked our experts

 

What advice would you give to Treasurers managing FX risks given the more volatile trading conditions currently?

 

Key takeaways

  • Carry out a thorough review of the hedging currently in place 
  • Understand if the Board and CFOs attitude toward FX has changed due to volatility
  • Understand the impact of a crisis on the timing over the duration of your FX policy
  • Be as open as you can about the performance of your company needs

 

Paul Leacy: Firstly carry out a thorough review of the hedging currently in place - is it still appropriate or does the level of hedging need to be changed in some way, are there any IFRS 9 issues likely to arise? Understand from the Board and CFO on whether the Company's attitude to FX has changed because of the volatility in FX rates and the ability to forecast FX exposures accurately. If a treasurer is confident they are not over hedged, relatively confident in the forecasts and has been given the greenlight from the Board and CFO that the policy has not changed, I would carry on as normal as volatility in FX rates is a double edged sword and not a reason to changing risk management behaviour.

 

Martin Walker: The current situation should not fundamentally change the defined policies on managing financial risks such as FX risk, interest rate and commodity price. However, the additional volatility can have very dramatic impacts on the mark to market price for existing trades and therefore available credit lines, or in some cases demands for collateral, negatively impacting and perhaps already stretched liquidity.  Treasurers will need to assess the current situation to see if any changes are needed. Most policies will allow for a range of actions, and the added business risk arising from the pandemic might lead to a more cautious approach on financial risk. Take note that any change in forecast for FX flows will impact the hedge ratios and many companies may find themselves “over hedged” if activity levels have fallen. 

 

Catherine Porter: Go back to your policy and review it. Stick to existing principles and assessment of exposures and how to mitigate, but still review exposures and consider if any adapting of policy to be further considered.

 

Nick Axton: Make sure you really understand the impact of this crisis on your exposures and timings over the duration of your FX policy. Remap revised exposures and existing hedges to reset cover levels to work out what additional risks need to be managed.  Make sure you speak to your banking group on a regular basis to know their capacity to trade (which will have most probably been reduced). Be as open as you can about the performance of your business and your FX needs.  Be prepared for banks to request CSA type arrangements. Consider whether you need the FX cover under these terms.

 

For advice or more information about the latest developments within the treasury world, visit the ACT website www.treasurers.org. They have a vast array of technical supports. Alternatively, feel free to contact us at Brewer Morris as we may be able to put you in touch with the relevant people.