FX Risk Management Policy & Objective Setting [VIDEO]

 

Today, I'm going to be talking about objective setting. And when we're talking about FX policies, a lot of times – almost universally, I guess – I see the objective in the policies to mitigate FX risk, and it's not really clear what it is we're communicating to the board of directors who is the audience for our policy by saying we're mitigating FX risk.

How do we communicate our success or failure? What does that look like? If you're trying to say, “Well, I don't really want to do anything and I don't really want to report anything,” then using an objective like “I want to mitigate the FX risk” will serve you well. But I think it's a good idea to really think about what it is that you, as a treasury organization, plan to deliver with respect to your FX risk management program.

Are you there to protect margins? Are you there to protect earnings? Are you going to selectively address currency risks that the company has? If you are going to do that selectively, are you going to do that based on size or are you going to do that based on the impact to earnings? Or is it going to be above the line? Is it going to be only below the line – kind of FX gain/loss management? Are you planning to programmatically address currency risk?

I believe that most hedge programs should take a deep breath, step back and determine what is really the objective. What is it that they are trying to do, are they smoothing the impact of currency into their financials, and really communicate that – share that with the board of directors through the policy objective statement.

It Makes Me Crazy...

What makes me crazy about policies is when someone takes objectives and strategies from a hedge policy at their old company and tries to just bring it and turnkey it right into their new company. And I'm going to share with you a couple of examples of why this makes me crazy.

I've been to companies where their currency exposure was actually limited to about a one to two day window, and the new treasurer wanted to bring in from his old company a layered hedge program that went out twelve months. And so for a company with exposure of one to two days, it's not really appropriate to be bringing in that program.

I've also seen people, especially those of you that are coming from very mature companies, try and bring your approach from your very mature company, and again, put it as a turnkey solution into a startup. And the way that transactions and revenues flow and financials are reported for a startup company is often very different.

So I really encourage those of you who are changing jobs – and there's a lot of you changing jobs these days – when you get to your new company, please dig into the financials, dig into how currencies are impacting those financials, and then start looking at what hedge policies and what strategies you are going to bring to play at the new company.