Antoine Jacquemin, deputy head for Western Europe with Societe Generale, which was named best bank for balance sheet hedging and FX options, among other awards. He discusses strategies for hedging foreign exchange risks.
Global Finance: How have the ways in which corporate executives approach foreign exchange (FX) risks changed?
Antoine Jacquemin: We’ve seen that FX risk management has moved up many CFOs’ priority lists over the past 18 to 24 months, due to higher volatility in the markets. There’s more focus on currency risk and how to manage it better. That’s true whether they [the CFOs] are concerned about operating revenue and cash flow, assets valuations, or for specific events, like mergers and acquisitions or disposals. Any currency risk is highlighted and considered earlier in the process.
GF: What strategies are corporate executives taking to manage these risks?
AJ: In specific, one-off situations, like mergers and acquisitions, where there’s exposure, often the numbers are big. Foreign-exchange risk management now is considered early on [as] transactions are structured.
For instance, when financing a cross-border transaction, we’ll consider the debt and currency mix. Say a European company is looking at a transaction in US dollars. We’ll ask whether it’s better to use euros and hedge the risk, or fund a portion of the transaction in US dollars so part of the risk is naturally hedged. We work with clients to determine the best mix, looking at free cash flow, net earnings [and] the impact on shareholder value, among other factors. We try to find the best balance between debt and currency risk and then hedge any residual risk with short-term hedging products, such as options or contingency features.
Another client was considering an acquisition in the UK—this was ahead of the Brexit vote. We built a hedging strategy in which the company was fully hedged, yet had an opportunity to benefit from any weakening in the sterling. That benefited the client.
GF: How might FX strategies change when clients are working in emerging markets? What considerations are unique to those opportunities?
AJ: We try to find the best way to hedge the FX risk at a price that makes sense. It can be difficult to hedge, because the forward premiums in emerging markets may destroy some of their operating margins, and because the liquidity in emerging markets may be challenging.
For short-term cash flow and balance sheet hedging, combinations of foreign exchange options can help clients to avoid paying too much of the forward premiums. Typically such strategies may allow companies to protect their guidance for the year with limited impact on earnings per share.
When it comes to long-term hedging, we may consider mixing cross-currency swaps with long-term options. The swaps provide long-term hedging protection, and the options bring flexibility while balancing the risk/reward of the hedging strategy.
Societe Generale has a strong presence in CEE, Russia, China, Brazil, and other emerging countries like in Africa. We’ve been able to work with local companies and divisions of multinational companies, be relevant in those markets and develop strong client relationships.