Managing currency risk: how do mid-size companies meet the challenge?

Publication: Business Credit

Publication Date: 01-NOV-06

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COPYRIGHT 2006 National Association of Credit Management

For companies that face significant foreign exchange exposure, establishing and maintaining an effective program to manage currency risk can be a major challenge. This article discusses how mid-size companies in the U.S. can manage their currency risk more effectively.

Large, global enterprises may manage currency exposure over dozens of currencies and hundreds of subsidiaries. Fortunately, while the challenge is great, so are the resources and expertise. These companies have invested tremendous resources over many years to develop in-house knowledge on the unique aspects of currency risk. They have systems to automate the tracking and reporting of exposures. For some, sophisticated measurement systems such as value-at-risk are employed to evaluate risk and establish derivative trading parameters. Additionally, there are specialized software applications that track and account for outstanding hedges and their underlying risks.

For mid-size companies in the U.S., those enterprises just below the Fortune 1000, the picture is entirely different. These companies may be on a rapid growth trajectory that has taken them to overseas markets for the first time. Even for those companies that continue to operate exclusively within the U.S., they may have moved their supplier relationships offshore. At the very least, these companies are recognizing that they now compete in a global marketplace. For these companies, there is an emerging concern that foreign exchange exposure presents a real and present danger. The question is, when treasury resources are stretched already, how do you meet the challenge?

One such mid-sized company contacted Treasury Strategies earlier this year regarding establishing a currency risk management program. This company, a U.S. $500 million revenue generating telecommunications software company, was expanding rapidly in Europe and East Asia and needed to set up a currency risk management program. The project was to perform in-depth interviews...

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