It’s the time of year when companies are looking to determine their technology needs for the coming 12 months. And where foreign exchange (FX) is concerned, there are plenty of reasons to be weary when it comes to currency volatility and how it impacts earnings, giving treasury teams much to consider when thinking about where FX risk management falls in the coming year’s budget.
It’s clear that ongoing geopolitical activity has brought numerous challenges where FX is concerned. The trade war with China is stoking concerns around a weaker yuan and the possible residual effects for emerging market currencies. In Europe, meanwhile, the October 31 Brexit deadline may be just around the corner, but considerable uncertainty remains about the form the UK’s departure from the EU will take – meaning traders are braced for further volatility in the coming weeks.
Winners and losers
When it comes to managing currency risk in this type of market, not all companies are alike. Some struggle, while others thrive. Companies that take full advantage of accurate data and visibility over their currency exposures will be best placed to manage their exposures effectively and improve their hedge ratios. Armed with accurate information, they are able to prepare for and protect against volatile currency movements ahead of time, instead of just reacting to markets.
In contrast, under-hedged companies – and those that lack timely data and full visibility into their currency exposures – are likely to find themselves at a considerable disadvantage, with volatile markets hampering their financial performance and valuations. Indeed, the July 2019 Kyriba Currency Impact Report found that North American companies lost almost $1m a day in Q1 2019 due to FX.
Recipe for success
With this in mind, companies need to consider how technology can help position them for success in the year ahead. They also need to be able to build a business case demonstrating the value of their proposed solutions. So, why should companies budget for FX risk management in 2020?
- Improved visibility. Access to accurate, complete and timely data provides increased visibility into currency exposures, which is essential when it comes to eliminating surprises and identifying opportunities to manage currency risk more effectively. This visibility can help organizations reduce trading costs and can help highlight opportunities for internal exposure elimination that might otherwise be missed.
- Identify your company’s sensitivity to FX. When building a business case for technology, it’s essential to understand how FX impacts may affect your business. A good FX solution can help you identify your EBITDA or EPS at risk, demonstrate how current exposures affect your business – and identify the possible implications of future FX impacts.
- Gain confidence. Using a cost and risk efficiency analysis tool, that some vendors – including Kyriba – provide, you can quantify current exposures, improve confidence in your hedging decisions and reduce your company’s overall FX risk by weigh the cost vs. the risk of hedging individual exposures.
- Make better use of time. Automating data collection and currency analysis through the use of suitable technology means your team can spend less time gathering data and grappling with spreadsheets, and more time on strategic and value-adding tasks.
- Generate quick wins. Instead of taking months to implement, a good FX solution can be deployed within a matter of weeks, meaning that you can substantially reduce your company’s currency risk within one quarter – thereby generating quick ROI and demonstrating the value of the solution to internal stakeholders.
In summary: geopolitical tensions continue to present considerable challenges for companies as they seek to manage FX risk. In this market, budgeting for – and adopting – an FX risk management solution can give you the tools you need to increase visibility over FX impacts, hedge more effectively and make better use of your team’s time. And rapid implementation time means there’s no lengthy delay before you can see results.
To learn more about the benefits of FX risk management solutions, download our recent eBook – Automating Corporate FX.