CFOs Utilise Complex Financial Instruments to Mitigate FX Volatility – Global Treasurer
(5 February 2024 – Global) Major enterprises are increasingly implementing sophisticated FX risk management tools to protect their balance sheet against adverse foreign exchange (FX) fluctuations according to major financial institutions, Global Treasurer reports.
Currency volatility has intensified globally, causing unpredictability in overseas revenue and expenses. To stabilise cash flows exposed to international markets, companies large and small now commonly take out currency derivatives like forwards, options, and swaps to lock in rates for future transactions.
Some treasurers are adopting risk analytics Key Performance Indicators (KPIs) and running recurring stress tests to measure their risk exposure while others are defining their hedging strategies dynamically based on their balance sheets or pricing pass-through constraints.
The advent of technology has led to the emergence of new platforms that facilitate hedging activities.
“Forward contracts are one of the most common hedging tools used by corporations, allowing corporations to lock in an exchange rate today for a transaction that will occur in the future, effectively eliminating the risk of currency fluctuations. Options are another popular hedging tool. An option gives the holder the right, but not the obligation, to buy or sell a currency at a specified exchange rate on or before a certain date.”
“Currency swaps are also used by corporations to hedge against exchange rate risk. A currency swap is an agreement to exchange one currency for another at a specified rate at multiple points in the future. This allows corporations to manage their foreign exchange exposure over a longer period.”
“The effectiveness of these hedging strategies depends on a variety of factors, including the accuracy of forecasting, the volatility of the currency markets, and the corporation’s risk tolerance. Corporations must continually monitor and adjust their hedging strategies to ensure they remain effective in the face of changing market conditions.”