How hard is it really to manage your foreign exchange positions? Often we over think it and probably over-complicate things at the same time. Sure if you are a large corporate with many and varied risks it isn’t easy but for most it can be pretty straightforward. You are either an importer or an exporter. Maybe you can offset some receipts or payments or maybe you can’t but generally you should be looking at managing your net position. That would be a good start to simplifying things.
Next, no matter how big you are you should have a treasury policy that tells you what instruments you can use, who you can deal with and any parameters you need to keep within e.g. Minimum and maximum hedging levels. Generally you should be able to deal with fx forwards and vanilla options. Of course many corporates will only do options if they don’t have to write a cheque, so probably it’s only fx forwards and zero-cost collars.
Ideally you would have two banks to deal with to keep some competitive tension and online dealing platforms are more common now so you don’t even need to ring up the bank to do the deal. You might want to for some advice or to remind the dealer that you are available for the rugby next week. What’s important with currencies though is the medium term trend, not what is going to happen in the next 24 hours.
You should have some parameters to keep within that reflect your business risks and competitive situation. Despite what some may tell you no-one knows where the currencies are going so it makes sense to carry minimum amounts of cover just in case you, your advisor or bank is wrong. Budget rates and costing rates are important to keep front of mind. No one will thank you for protecting the budget rate but everyone will point the finger if you don’t.
We live in an age of information overload so don’t get bogged down on too much detail. Everyone will have a different story on where the currency is going and why. Form your own view on the basis of your own business. If you are unprofitable at a certain level then make sure you have as much cover as possible if it gets close to those key rates. If you know your competitor is covering everything on a short term basis you might need to reflect this in your own policy.
It is also really important to keep an accurate record of your positions and hedges. Not just for yourself to make the right decisions but also to easily report where you are to senior management. For whatever reason everyone seems to have a view on where the currency is going and happy to tell you when you get it wrong. Having good controls and recording mechanisms in this area will give others in the organisation confidence in the way you are managing a sensitive part of the business. They might just ask a few less questions too!
I am not saying currency hedging is easy, far from it, but it shouldn’t keep you up at night either if you follow some basic guidelines and principles.