FREQUENTLY ASKED QUESTIONS

What is FX risk?

Foreign exchange (FX) risk is a risk that exists when transactions take place in varying currencies outside of a company’s functional currency. This risk occurs when a company’s exposure to the currencies it does business in is not properly managed. If a volatile movement occurs in one of the transactional currencies and the company has not managed the exposure to that currency (either via organic exposure elimination or hedging), then they are susceptible to negative impacts to their earnings per share (EPS) and earnings before interest, tax, depreciation and amortization (EBITDA).

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Mitigating FX Risk

To avoid impacts to earnings, organizations work to manage their FX exposure and risk. This can be done by organically eliminating exposures internally or by hedging exposures.

Balance Sheet Exposure Management

Balance sheet exposure management entails treasury professionals measuring, monitoring and managing currency exposure and the associated risk from their balance sheet.

The benefits of balance sheet exposure management include:

•  The ability to manage EPS @ risk to the industry MBO of less than $0.01
•  Increased exposure identification
•  Increased visibility to exposures
•  Reduced program costs
•  Reduced FX risk
•  Improved hedge program

Cash Flow Exposure Forecasting

Cash flow exposure forecasting consists of the creation, analysis and management of currency exposure from forecasted transactions and cash flows.

The benefits of cash flow exposure forecasting include:

•  Improved predictability of EBITDA
•  Increased forecast accuracy
•  Increased participation in the cash flow process
•  Reduced cost of hedging

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