Foreign Exchange Risk Mitigation a Hot Topic for Corporate Treasurers: Survey

Sophisticated protocols for assessing and managing risk are under consideration at an increasing number of US firms.

That’s the takeaway from a recent survey of more than 100 risk-management webinar participants.

Cash Flow at Risk and Earnings at Risk risk-management protocols are gaining traction as modern, sophisticated techniques for balancing liquidity and earning risk while minimizing foreign exchange losses. Among webinar attendees, 64% said they need to improve or are considering improving their company’s hedging policies. About a third (34%) said they were already using CFaR or Value at Risk analysis methods. Another 29% of them said that they are considering CFaR, and 8% said they had never heard of it.

The survey is not a representative sample of corporate risk managers. The surveyed professionals had already expressed interest in CFaR and EaR by attending the webinar.

That doesn’t mean the responses are without value, however.

The survey highlighted obstacles that prevent companies from adopting CFaR-based hedging policies. Two-thirds of treasurers reported that the main obstacle is the difficulty of explaining the policy internally and to the board of directors, while 41% said the main obstacle was the company’s reluctance to change its current technology. Complexity of the sophisticated policies was cited as an obstacle by 29% of respondents, and 26% feared the policies they would be too costly to implement. Would the benefits of modernization repay the time and trouble of revising current policies? About 13% expressed doubts.

Mark Lewis, who is the Corporate Treasury Product Manager at Bloomberg, confirmed that the discussion they had with corporate treasurers also explored the importance of KPIs (Key Performance Indicators).

"For cash flow and earnings volatility, companies are shifting away from the outdated percentage hedging model to a risk management perspective, as they are not able to tie their old strategies to the KPIs the board is demanding," said Mark Lewis, Bloomberg’s corporate treasury product manager. Lewis said Bloomberg is trying to improve the way tools like CFaR and EaR can be presented to companies that would benefit from them.

"We have been working closely with clients to address the very real challenges of explaining CFaR/EaR to their boards and of updating their legacy technology systems,” Lewis said. “Bloomberg makes tools available that can be used by clients to backtest the change to CFaR/EaR and make it easier to explain how this technique proves out over time. Furthermore, our tools can be used end-to-end or plugged into an existing workflow, making implementation seamless."