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CFOs Can Improve Earnings Predictability Despite Currency Volatility

By Andy Gage
SVP, FX Sales and Advisory Services

Foreign Exchange Risk Volatility

Volatility and uncertainty in 2023 have no signs of cooling down as traditional indicators and many financial institutions predict and anticipate a recession to hit this year. Forecasts for the U.S. dollar over the next year are mixed, but it’s safe to say that it will be volatile and unpredictable. While many factors affect foreign currency (FX) risk—from interest rate differentials to political instability; CFOs are increasingly challenged in managing how their foreign currency exposures will ultimately impact their financial reporting results.

While many externalities and economic conditions will impact the results of the business during any year, and are often outside the CFO’s control, one thing is certain: FX risk results can and should be predictable. CFOs can arm their finance leaders with ways to mitigate as much FX risk as cost-effectively possible.

With so many external threats and economic uncertainty, CFOs need to control the outcome and financial results in their power to manage. Foreign currency risk should be taken off the table as an “unknown” or under-hedged risk.

How CFOs Can Counter Uncertainty

To effectively counter and manage the impact from foreign exchange volatility and position their organizations for greater capacity for effective decision-making, CFOs can expand technology availability to their orgs. The key drivers for FX technology are 1) remove obstacles due to disparate systems and legal entities, 2) standardize and transform inaccurate and inefficient methods for exposure/risk identification, and 3) optimize FX Risk management decisions (cost effective mitigation, and effective results). Basically, mitigating FX risk starts with accurate and timely data combined with the ability to make intelligent quantitative decisions.

Removing Obstacles for Finance

One obstacle to effective risk management is the incomplete capture of exposure information. One critical area CFOs can influence and deliver positive impacts for their teams is to give them ways to integrate and aggregate information from various legal entities and the variety of systems generating exposures. Integrated and consistent information related to FX risk exposures is difficult to aggregate across newly acquired entities, business units or complex legal entity structures. In most cases, there are not only disparate systems involved that are very difficult to integrate or sync, but the underlying data is not harmonized or rationalized. CFOs need to start with technology to help their teams quickly access information across the entire finance systems landscape for better visibility, risk analytics, and timely reporting.

Streamlining Risk Identification

I recently spoke with a risk manager whose organization cannot hedge due to unreliable data that is only accessible once per month during financial close. Obviously, a company cannot mitigate risk effectively if they don’t have accurate information on the underlying risks. But assuming the data was accurate, they still would not be able to effectively mitigate risk due to the timing issue of only having visibility once a month after month close. By the time they would settle on any mitigation actions, the real numbers have already changed. Technology to automate and speed the collection and organization of exposure and derivative data corrects both of these challenges by giving companies faster, relevant data, and the timely opportunity to analyze and investigate changes or trends.

Optimized Hedge Decisions

Hedging is often necessary; but, when is hedging too much or not enough? Are there frequent adjustments needed and missed opportunities to hedge at the right levels? Is it unknown what those levels should be? SaaS Risk Management solutions today deliver the ability to analyze opportunities for natural offsets to reduce the amount of external hedging required to meet your company’s risk management objectives. With the remaining identified risk, flexibility is enhanced by allowing scenario analysis and evaluation of both the risks and associated costs of hedging. This ensures the company is able to take advantage of cross currency correlations within their exposure portfolio to lower the overall cost of hedging.

Rapidly Changing Conditions Spark Action

With economic conditions changing rapidly, CFOs are looking for ways to maintain their competitive edge and deliver transformation. CFOs and their finance teams will no longer rely on disparate systems and various levels of technology, lest be left behind by the competition. With investment in leading cloud-based SaaS technology with deeper exposure capture, trade management and analytics, the CFO will deliver true transformation and evolved finance people capabilities, process improvement, and systems value for finance and the greater organization. The bottom line is that CFOs need to keep up with the changing currency environment. Currency risk can be a useful tool for your business, but it also brings challenges. If you’re not sure how to cope with these challenges, reach out to [email protected] to learn more about how Kyriba’s award-winning solutions drive greater FX Risk Management value and insight for the CFO and treasury.