A watchful eye on currency fluctuations

The tumbling value of the dollar has kept the currency in the headlines over the past few months. In November it touched a 14-month low against the euro and recently there has been discussion about its ongoing viability as the leading reserve currency, though it seems utterly improbable that it could be deseated.

Not all FDs are savvy at managing the impact fluctuations in currency markets can have on their business, nor are they always aware of the benefits that currency movements can hold. They are often not aware that currency movements can have a big impact on operational gearing.

“If a change in FX valuation lowers a company’s gross margin by two percentage points that can have quite a serious impact on earnings per share,” says Geoff Baker, director of the currency manager Insch Active Advisory. “Too many FDs take the ‘head-in-the-sand’ approach when it comes to forex. One piece of advice we give is that companies need to monitor changes in currency values and the impact they can have on a company’s accounts.”

Making an impact
Once a company monitors the impact currency movements have on the business, they can decide whether it is worth putting a hedge in place. “There are so many options in the market for all levels of risk appetite that a company is bound to find one that suits them,” says Baker.

Stuart Perry, senior corporate sales at forex services company Baydonhill, concurs. “By putting a hedge in place, the company can lock in the right exchange rate and have fixed figure that allows them to budget accordingly.”

It’s just as important to be vigilant if changes in forex values are bumping up the company bottom line. “Don’t make the mistake of thinking this is due to anything other than luck. The situation can change for the worse over a short period,” says Baker. Just think back to the fate of Karim Naffah, who had to leave his role as FD at pubs operator Mitchells & Butlers in 2008 after it lost £274m on an interest rate hedging deal he had brokered which fell victim to bad timing. The market simply turned against what seemed, at the time, an eminently sensible deal.

Baydonhill’s Perry thinks it especially important for FDs to hedge currency risk now. “As economic uncertainty is unlikely to go away anytime soon, it remains difficult to forecast exchange rates with any reasonable accuracy, so further volatile swings are highly likely.”

Smaller companies should not think hedging currency risk is best left to those FDs at big companies. “Larger companies often find that different business areas around the world can balance out the impact of currency fluctuations. It is often smaller companies that get burned by changes in FX,” says Baker.

Read about Karim Naffah and FDs as the corporate fall guy at www.financialdirector.co.uk/2220912