A question often asked by senior management when evaluating their company’s foreign exchange (FX) risk management activities is “What do other companies do?”
One possible place to find that answer is the recently released 2018 Corporate Risk Management Survey from Wells Fargo Foreign Exchange. The survey offers insights into the hedge programs of 330 of our corporate clients.
A word of caution, though. The survey results may be a better indicator of leading corporate practices rather than best practices. For example:
- Only 23% of respondents quantify potential risk to changes in FX rates, with only 12% of private companies indicating they quantify risk.
- Only two-thirds have a formal FX risk management policy. Again, private companies were the worst offenders compared with their public counterparts: only 48% of private companies said they have a formal policy in place.
- 43% said their biggest challenges in managing FX risk are dealing with market volatility and deciding when to hedge and which strategy to use. Another 32% said their biggest obstacle is the accuracy and timeliness of exposure data.
These are not good numbers in the sense they indicate:
- A large number of companies are not fully equipped to manage their FX risks effectively.
- Many companies lack objectives and a decision process to formulate a coherent strategy.
And, if companies don’t have good exposure data, it’s easy to understand why they don’t quantify and report risk to their senior management. In other words, this indicates a lack of basic corporate oversight and poor controls.
So what’s a company supposed to do? We recommend you first identify the basic principles of a best practice approach, and then apply those to your company’s situation. These best practices should serve as a guide for building policies and infrastructure to manage risks effectively.
A suggestion on where to start this process or to make improvements to an existing program is to do what’s necessary to get the right data. Without it, it’s impossible to move forward.
We define those best practices in the eight steps shown below, based on the Committee of Sponsoring Organizations (COSO) framework, which is the basis of SOX controls.
Each of these steps looks almost boring by itself, but if taken in context of the survey results, the responses show many companies fail some of these basic steps, namely, they:
- Don’t define hedge objectives consistent with corporate objectives
- Fail to identify and quantify exposures
- Lack clearly articulated objectives and strategies designed to achieve those objectives
This is what separates best practice companies from everyone else.
Although the survey results may not serve as a benchmark for what your company should do, they might provide valuable insights into the challenges companies face in managing FX risk and things to try to avoid. This can help you prepare to take the steps necessary to get it right.
Second, comparisons to competitors or other companies in the same industry can be strategically important. Equity analysts often paint companies with a broad brush in regard to FX risk. If a competitor gets crushed by an FX move, the assumption is your company is getting crushed, too.
Looking at survey results and gathering information from public sources on what and how competitors hedge can help CFOs differentiate their company’s situation from everyone else’s.
These comparisons can also help companies develop strategies that might provide a strategic advantage. Instead of doing what everyone else is doing, the best answer might be to do what no one else is doing.
Matthew N. Daniel is a managing director for the FX Risk Management Group at Wells Fargo. A specialist in the management of FX risk with over 30 years of experience, Matthew assists clients in managing and mitigating corporate FX risk, developing risk management policies, and implementing effective financial reporting practices in compliance with accounting guidelines. He is based in New York.
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