FX Supplement 2014 | Corporate Hedging

Author: Susan Kelly

HEDGING EFFECTIVELY

Increased volatility makes hedging more expensive, but it shouldn’t alter the effectiveness of a company’s hedging program, says Luis Montiel, assistant treasurer at Jabil Circuit, a contract manufacturing company based in St. Petersburg, Florida.

The keys to hedging effectively are understanding the company’s business and the data associated with its business flows, Montiel says, adding that knowing the business relates to understanding how the cost of goods sold moves through the supply chain: “If you don’t understand what you’re hedging, it becomes extremely difficult to say you’re effective at it.”

Companies also need to have a clear handle on the information flows associated with transactions. “If you were to sell in euros today and wait three to four days to book that into your enterprise resource planning system, that lag of time doesn’t allow you to have the real-time data to say, ‘I just sold X amount in euros that needs to be hedged,’” says Montiel. “That is the type of data visibility that companies need to have an efficient program.”

VOLATILITY VERSUS REGULATORS

James Lockyer, director of development at the Association of Corporate Treasurers, argues that regulatory change poses a far greater challenge to corporate FX hedging than market volatility.

“The biggest driver in hedging foreign exchange risk at the moment is actually regulation,” Lockyer says. He cites new reporting requirements related to Dodd-Frank in the US and the European Market Infrastructure Regulation in Europe, as well as new bank capital requirements.

The capital adequacy and liquidity requirements that are part of Basel III are resulting in banks’ charging more for long-term hedges, because they have to hold more capital against them, and are affecting “the maturity of trades which corporations can enter into with banks,” he says.

Montiel describes the regulatory environment as “quite a large burden” and says that, from Jabil’s perspective as an end user of derivatives, it’s often “not transparent and extremely clear what we are supposed to be doing” to comply with regulations. But he adds that compliance with regulations is just another one of the risks that companies have to deal with in their hedging programs, as is market volatility: “There’s not a risk that we don’t address on a continuous basis.”


FOREIGN EXCHANGE SUPPLEMENT 2014  | SECTIONS