Currency Risk Management 101

Currency Risk Management 101: tips for managing foreign currency revenues, costs and operations.

Part of any growth business model likely includes operating in other countries and other currencies. This can expose a business to different risks, whether it’s transactional, translational or economic. With financial markets being quite unpredictable, finance leaders want to ensure that profitability and unit economics are protected from currency risks, as much as possible.

We discussed the issue of currency risk management at our January CFO Connect workshop in London, led by Alex MacAndrew, founder & COO of Bondford (a risk management advisory). He shared some ways that finance leaders can better manage foreign currency revenues, costs and operations.

Here are a few key takeaways from the workshop:

• Currency markets are inherently unpredictable and most corporations have some exposure across financial statements.

• In many cases natural hedging (for example locating production overseas or raising foreign currency debt) can mitigate currency risk over the longer term and is a worthwhile strategic consideration.

• Financial hedging is a flexible solution to mitigate residual exposure. This includes the use of FX Forwards, Swaps or Options.

• Finance leaders should consider a currency risk management strategy when the business has production opportunity costs or opens branches abroad, in countries that use different currencies.

• A best practice risk management process includes:

  1. Risk identification and measurement.

  2. Objective setting & policy definition.

  3. Hedging strategy analysis and calibration.

  4. Achieving Best Execution.

A big thanks to Alex MacAndrew of Bondford, for sharing his expert insights on currency risk management, and to all of our CFO Connect members in London who attended.

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