Amid pandemic, increased concern but a steady course for FX programs
Few of us will soon forget 2020. From the extraordinary disruption of the COVID-19 pandemic this spring through a summer of social unrest and a divisive fall election, it’s been a year for the record books.
Surprisingly, amid all the challenges and economic uncertainty, the latest edition of our biennial Risk Management Practices Survey found those who manage their company’s FX risk programs taking a calm and steady position. Overwhelmingly, the results suggest that FX risk management programs have proven resilient and supportive of company efforts to weather current conditions.
The 2020 survey analyzes input from 175 respondents who represent a diverse cross-section of public and private companies in various industries.
Key findings include:
Increased concern for FX risk
Perspectives from respondents are not entirely rosy. As expected with the high degree of global uncertainty, 38 percent expressed greater concern about FX risk management in 2020 compared to the previous year. This level of concern is 12 percent higher than the results of our last survey in 2018, which followed a benign environment marked by relatively low currency volatility and a weakening U.S. dollar.
In 2020, market volatility continues to represent the greatest challenge for FX risk managers, followed by accuracy and timeliness of exposure data.
Greater adoption of formal policies and practices
A bright spot in this year’s results comes from a noticeable increase in organizations taking a more disciplined approach to their risk management activities. Putting appropriate policies and risk management strategies in place helps companies navigate unpredictable conditions, whether it’s employees suddenly working from home, rapidly fluctuating currency prices, the ups and downs of economic cycles, or unforeseen circumstances like a global pandemic.
In 2020, nearly 80 percent of companies surveyed have a written hedging policy in place, up from just 66 percent two years ago. Eighty-four percent of these companies review or update their policy annually or more frequently, a discipline that ensures support of corporate objectives and resilience to weather varying economic conditions.
Leveraging technology and quantitative measurements
Thirty-five percent of survey respondents indicated their company had made technology upgrades in the last 12 months. Improving systems supports effective risk management with decisions based on timely, accurate, and complete data.
One in four organizations use quantitative or statistical methodology to measure risk, a slight uptick from 2018 numbers. This metric provides another indicator of the greater emphasis firms place on a rigorous risk management infrastructure.
Opportunities for 2021
While organizations continue to enhance the strategic guardrails for their FX programs, opportunities remain to further strengthen risk management in 2021. One in five companies still lacks a formal policy. Many more struggle to quantify their risks and exposures. The absence of these two pivotal elements remains more prevalent at private companies than at their publicly traded counterparts.
As your organization prepares for 2021 and beyond, Wells Fargo can be a resource. Contact us to understand the elements of a robust risk management framework or for support to quantify your risk exposures.
