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Foreign Exchange Risk Management and Brexit

Foreign Exchange (‘FX’) Risk Management (or Currency Hedging as it is often referred to) is forming an increasing part of the Treasury Solutions service offer.  The high level of volatility of the Euro against its major trading currencies (especially US Dollar and Sterling) has meant that companies have had to deal with FX Risk Management on a much more formal and integrated basis in recent times. he result of the Brexit referendum has pushed this to the top of the Board agenda for importers from and exporters to the UK.

In the past, this has posed certain problems for companies, not only because of the speed at which this market moves, but also due to the range of derivatives available to manage this risk. In some cases companies were not always familiar with the alternatives available to them and/or Board of Directors was cautious about the use of derivatives.

Treasury Risk and FX Management

  • Devise FX Hedging strategy as a pre-cursor to investment and/or acquisition activity
  • Devise FX Risk Management strategy where borrowings are in a currency other that EUR
  • Asses the impact of foreign exchange rate movements on EUR dominated prices where goods are supplied from outside the Eurozone but invoiced in EUR to Irish Companies
  • Undertake accounting and foreign exchange projects (especially for both multi-nationals and high-tech export oriented companies)
  • Devise foreign exchange risk management strategies where companies have material exposure on either their purchases or sales to movements in foreign exchange rates in order to assist in the achievement of profit targets, margin attainment or financial covenant compliance.

Case Study

The Story

Company G had a significant exposure to US Dollars (‘USD’) through a raw material that it purchases.  The associated revenues were in Euro (‘EUR’) but the price of the produce in EUR was somewhat dictated by the relative movements in the EUR/USD exchange rate.  Treasury Solutions was engaged by the client in order to assess its current FX management practices, what changes could be made to the existing practices, the opportunity for the company to use different types of derivatives in order to manage this risk and finally to ensure that the reporting of both exposures and their hedging was to a high standard.

Work Done

  • Document existing processes, including who was responsible, dates upon which exposures are known/identified and communicated
  • Identification of both those with whom the initial risk lies and those with whom the risk of management and the foreign exchange risk arises
  • Review of past performance (FX gains and losses) and overall evaluation of past hedging strategies
  • Identification of change to the buying process and communication of exposures within the group on a timely basis
  • Identification of appropriate derivatives to use in order to manage the risks
  • Review of documentation associated with FX Risk Management (ISDA Agreements, Treasury Dealing Mandates, Memorandum & Articles of Association)
  • Review of existing foreign exchange exposure and hedging reporting
  • Review of existing foreign exchange management policy
  • Devise new reporting formats for the reporting of foreign exposures and hedging to the Board
  • Issuance of report to deal with efficiencies identified, changes to processes and other work to be done in order to achieve best practice in the area

Project Output

A detailed report to the Board of the client covering all aspects of foreign exchange risk management in the company.

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