The UK is front and center in a global increase in foreign exchange / FX management hedging as both Brexit and Covid have shaken the pot. The once steady and reliable Pound is increasingly volatile. Add to this, more UK companies needing to source both suppliers and customers from ‘offshore’ it is easy to see why FX hedging has come to the fore.
This has put the spotlight on the importance of faster, more accurate FX hedging and highlighted the changing landscape for FX management in the UK over the past year. There are four key areas of change all of which are the direct impact of increased volatility. The UK’s previous relatively stable Sterling enabled many to put FX hedging off the priority list. But that is no longer the case.
FX Risk Management Policy
FX hedging must be part of any importer or exporter’s risk management tool kit. Just as you need to have risk management policies for managing other key parts of the business, now you need a foreign exchange policy as well.
Companies need to identify their tolerance for risk and that comes in all shapes and sizes. Even doing nothing is a legitimate approach, provided the decision is made consciously and not just through hope and crossing fingers. Having an FX policy in place enables faster and better decisions to be made but also ensures you are acting within your current appetite for risk.
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Cashflow Forecasting Just Got Harder
Forcing a more pragmatic approach is concurrent with the increased complexity in cash flow forecasting. Once reliable supply chains are anything but. It makes forecasting – which has always been a challenge – exponentially harder. If the cash flows are in a foreign currency, you’ve just added another multiplier to risk and difficulty.
If you are managing foreign currency cash flows then your hedging will need to be dynamically changing at the same time. Whereas you might have covered 100% of every committed forecast previously, now you might be reducing that or buying insurance through FX options.
You need to build need some flexibility into your forecasting so if an order doesn’t eventuate, or gets pushed out longer than expected, your FX hedging can be adjusted accordingly.
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FX Management Frequency Increasing
All of this has accumulated in the third insight; FX risk management is no longer a monthly or quarterly activity. To manage both the currency volatility and the increased risk, companies are reviewing their hedging positions far more frequently, particularly in the UK.
The increase in risk has driven much closer monitoring. There is not only a greater uptake in tools to manage FX risk effectively but an overall increase in their use. The majority are reviewing their FX positions are being reviewed multiple times a month which certainly wasn’t happening a year ago, with many accessing their position on a daily basis.
No Longer in the Boardroom
Finally, lockdown spurned another challenge for those managing FX risk. Conversations could no longer be held behind closed doors, with the relevant information presented over the table. Instead, the information now needs to be securely accessible to all, no matter where they are located (including your bank and currency broker).
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It also needs to be one version of the up-to-date truth as managing multiple versions adds an unacceptable layer of risk. Spreadsheets are no longer fit for this purpose. Even if your treasurer is an expert and can do the multi-faceted calculations required it just isn’t current, or secure, enough to be viable when working remotely.
And this isn’t going to change. We have lived with remote working for so long now that most believe a hybrid of working from home and working in the office will remain for the foreseeable future. In our world – it means FX hedging decisions will continue to be made with remote engagement which supports a higher cadence of FX management.
Banks Slow to Change
However, banks, currency brokers and auditors are still very much part of this equation. And while audit firms have rapidly come on board with moving to digital solutions, banks and currency brokers are disappointingly slower to change.
This isn’t just a UK phenomenon as around the world customers are starting to push banks hard for online FX risk management. It is surely in everyone’s interest to be operating off the same information, including the modelling of different options and attributed risks.
While it was once a monolithic job to install a treasury management solution, cloud technology has considerably changed that. Banks and currency brokers need to move faster on this or their customers really will leave them behind.
[To share your insights with us, please write to sghosh@martechseries.com]
