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Risk-Management : Currency : Hedging Strategy : Survey

Currency Volatility Unrelenting

More than a third expecting to employ more hedging

Guido Schulz
Global Head of Strategic Management

AFEX, one of the world’s largest non-bank providers of global payment and risk management solutions, announced the results of its inaugural Currency Risk Outlook Survey, indicating that a vast majority (88%) of its clients in the U.S., UK and Australia foresee currency movements to be as or more volatile in the next 12 months than the preceding year.  The survey polled 452 businesses around the world and found that half of the respondents will employ a hedging strategy in 2014, with more than a third (35%) expecting to hedge more than they did in 2013.

Connected world markets

The end of the first decade of the 21st century saw currency markets experience volatility, as first the sub-prime loan crisis rattled longstanding Wall Street institutions and then the Euro-zone crisis took root.  These events served as a perfect storm to undermine the global financial system, in turn forcing the hands of federal bankers to manipulate their interest rates and currencies in the hope of reviving stagnant economies.  AFEX experienced this first hand, as forward contract usage by clients surged over 25% since 2009.

At the same time, the world was growing more closely interconnected and cross-border trade escalated, with more businesses looking overseas for growth.  Levels of international trade are set to climb, with 37% of businesses surveyed seeking to conduct more global commerce than in 2013, with Western Europe, China and Asia (excluding China, India & Japan) expecting to see increased trade.

“The survey results correlate with our historic client demand, as we’ve seen our client base more than triple since 2006,” said AFEX Chief Executive Officer, Jan Vlietstra.  “As more businesses seek to grow beyond their borders, they take on additional and often unforeseen risk, requiring counsel in addition to a robust and secure payments platform.”

Currency exposure

As international receipts and invoices pile up, businesses often bump up against unforeseen challenges that they didn’t face when engaging in commerce within their own borders.  Respondents indicated that their most significant concerns include being exposed to currency risk (41%), finding and reaching the right suppliers/customers (26%) and having the ability to make and receive payments (11%).

One of the most important considerations is to evaluate how much of a firm’s revenue is exposed to currency risk.  The U.S. clients surveyed had the lowest revenue exposed, with an average of 26% exposed.  This compares to an average of 34% for companies in the UK and 37% for those in Australia. The U.S. in general is less reliant on outside goods, whereas the UK and Australia tend to rely more on imports.

Firms with low levels of foreign currency exposure might not hedge because the downside risk does not warrant the cost, and nearly half (40%) of those polled fall into this category. 

“Many of our prospective clients are unsure of whether to hedge, and part of the AFEX value proposition is in having account executives on the ground who can provide advice in all of the countries in which we operate,” said Guido Schulz, Global Head of Strategic Management at AFEX.  “We pride ourselves on our currency savvy and online payment platform , AFEXDirect.   

AFEXDirect enables a holistic view of risk which can help the client quickly ascertain what percentage, if any, of their revenues they should look to protect via hedging.”

When managing currency exposure, almost half (47%) of those polled aim to reduce the potential for losses, a quarter (24%) sought to mitigate downside risk while retaining some upside potential, 18% sought total certainty as to their exchange rate and 11% hope to maximize the opportunity to profit from currency movements.

 Hedging strategy

“Devising a hedging strategy and keeping a long-term view is of utmost importance, especially as it concerns smaller businesses where the owner wears many hats,” said Schulz.  “Even large multinationals can have difficulty keeping tabs on rapidly fluctuating currencies; in recent quarters large blue-chip companies have had their bottom line shaved due to unexpected currency volatility.”

Half of the survey respondents indicate that they do hedge, with the largest portion indicating that they utilize a forward contract (44%).  Other strategies employed are natural hedging via geography (5%), options (3%), futures (1%) and swaps (1%). 

In addition to currency volatility (43%), other top challenges facing respondents seeking to mitigate risk include global economic policy uncertainty (17%), lack of currency expertise/savvy (16%), access to accurate timely market data (10%), difficulty assessing currency exposure (9%), cost of hedging (4%) and lack of automated processes/platforms (1%).

“While devising a hedging strategy seems daunting, once you know your currency exposure, lock in a hedge that will provide certainty for your business and don’t fret about short-term ebbs and flows in the currency markets,” said Schulz.  “Leave the casino mentality to traders and focus on growing your business in a prudent manner.”

This advice would seem to resonate with survey respondents, who indicated that competitive currency rates (75%), customer service (63%) and currency expertise (47%) were the most important factors when considering a payment solutions provider.

About the survey

AFEX polled clients based in the United States, the United Kingdom and Australia, and across a wide swathe of industries, to determine their perspectives on currency risk and what strategies they employ to mitigate that risk.  The survey was conducted from Wednesday, February 26th, through Friday, March 7th, with 452 respondents in total.

About AFEX

Established in 1979, AFEX is a leading global payment and risk management solutions provider that specializes in cross-border transactions and provides market expertise and unrivalled customer service for businesses and private clients. With a client base of over 17,000 active commercial customers worldwide, AFEX prides itself on tailoring its payment and foreign exchange services to meet its clients’ needs. AFEX’s online payment platform - AFEXDirect provides clients with one consolidated overview of their currency exposure and makes it easy for companies to manage international invoices. AFEX maintains offices across the United States, Australia, Europe, Middle East and Asia.

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