www.pwchk.com
April 2016
Managing Foreign Exchange Risks Braving the FX volatility storms with confidence
FX volatility has been increasing and is here to stay Given the turbulent nature of the foreign exchange (FX) markets over recent times, the negative impact of currency volatility on organisations has been staggering. Major currency pairs showed sharp increases in volatility, and these volatility levels are likely to persist due to several key risk drivers.
Prolonged period of unusual or extreme FX movements could lead to material fall in receipts or increase in costs, affecting corporates’ cash flows, profitability, and give rise to various business issues. Organisations with FX risks cannot afford to take the mean reversion gamble. According to PwC’s Asia Corporate Treasury survey, we found that while 61% of the surveyed treasurers put FX risk as a top priority, nearly half of them admitted that they do not have a formalised and robust approach.
FX risk drivers
Capital Markets : Commodity market (e.g. Gold, crude oil prices), fiscal and monetary policiesInternational Trade : Exporting and importingEconomic Fundamentals : GDP, inflation, unemployment levelPolitical Landscape : Geo-political tension, regime stability
FX risk is a top concern, yet some corporates lack a tested approach
Normalized Implied Volatility for Major Currencies against USD (Year: 2013 - 2016)
0
100
200
300
400
500
600
Normalized Volatility
01/04/2013 01/10/2013 01/04/2014 01/10/2014 01/04/2015 01/10/2015 01/04/2016
CNY EUR AUD RUB MYR
465
553
218
Source: Bloomberg
A formalised FX risk management framework, together with a solid governance structure anchored by the Board and key management teams, is important for organisations to be adequately prepared for extreme market conditions, and be able to respond and adjust on a timely and rational basis.
45% 61%
Source: PwC Asia Corporate Treasury Survey 2014
FX risk is top priority
No formalisedapproach
Corporate risk appetite & risk management goals
A robust FX risk management framework starts at the strategic level and encompasses detailed processes and enabling infrastructures in order to ensure it is practical and executable. The following is a tried and proven framework that PwC has implemented to help manage FX risks for clients across different industries.
What can an organisation do to stay ahead of the curve? Here are some practical initiatives that we have discussed and helped our clients to put in place.
Strategy
Process flow
Infrastructure
A robust FX risk management framework is essential
Leading FX risk management measures to deal with market uncertainty
Corporate vision, mission & objectives
Identifying risks
Quantifying risks
Control measures
Transaction execution
Performance assessment
Define risk categories and identify sources of risk from business as well as treasury transactions, take into consideration any natural offsets
Quantify the impact of FX volatility towards net profit and balance sheet via sensitivity analysis, VaR, stress testing, etc.
Implement hedging strategy by choosing the right hedging tools and determining the locking exchange rate
Complete transactions while adhering to the relevant accounting procedures and standards
Prepare exposure / transaction / hedge effectiveness reports, assess the performance of control measures and make necessary adjustments
Governance & organisation,
people, roles & responsibilities
Authorisation & limits
Working guidelines & procedures
Technology
Review / Reassessment
Establish clear strategic FX management policy across Board to management levels to enable timely and efficient hedge decisions
Develop dynamic tool and process which take FX cash flow forecasts, market data, and other factors to support a proactive hedging strategy
Build in FX adjustment mechanism to review product pricing & budgeting process
Set up FX monitoring and reporting structure, often aided by systems, to enhance visibility of gross & net exposure against risk budget appetite
Develop contingency plan or hedging programme to deal with Black Swan events
Apply Asset & Liability Management techniques to manage currency mismatches
1 Publication Title
PwC’s Corporate Treasury Team has years of world-class experience in advising on foreign currency risk management
Canada
China
Finland
US
Mexico
KoreaJapan
HongKong
South Africa
New Zealand
Australia
UKRussia
India
Sweden
TurkeyMorocco
Norway
PolandGermany
SpainFrance
Portugal
MalaysiaThailand
SingaporeIndonesia
VietnamPhilippines
Brazil
Chile
Peru
Argentina
Italy
Our Treasury Team150 countries,1 team, 500 professionals
Voted Number 1Treasury Consultant for 15 years running by Treasury Management International
Contact us today for a sharing on FX management and hedging strategy
Albert LoPartner HK/CN Treasury Consulting Services +852 2289 1925 [email protected]
Edmund LeePartner HK/CN Finance Consulting Leader +852 2289 2714 [email protected]
Peter WongConsulting Director HK Treasury Consulting Services +852 2289 1971 [email protected]
Owen WuManager CN Treasury Consulting Services +86 21 2323 2151 [email protected]
www.pwchk.comThis content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
© 2016 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. HK-20160412-5-C2