Performing a holistic review of your operational FX hedging program

Identifying objectives and defining the risk footprint

Objectives can shift based on external factors, such as private versus public ownership, competitive landscape, or changes to global risk footprint or risk tolerance levels. Internal factors may also play a role, including changes in key personnel or initiatives to drive automation or cost management.

Identifying tensions and constraints

As companies grow, some constraints will become more complex, while others may diminish. For example, a growing organization may have an increasing number of legal entities and cross-border transaction flows across the organization, but they may also grow into intercompany netting structures, create natural risk offsets across the organization, or even migrate multiple ERPs into a single platform. These types of changes can affect hedge accounting capacity, trading costs, operational support needs, and the resulting level of risk mitigation the organization can achieve.

Strategic decisions

Hedging strategies are driven by the combination of the risk footprint and the company's overall objectives and constraints. When the footprint changes materially, whether through the magnitude of foreign exposures, currency composition, or even pricing/contract structures, the same strategies will likely yield a different relative impact on risk metrics. Likewise, changes to the firm's priorities will also drive a disconnect between the hedging strategy and its effectiveness.

Tactical decisions

The operational elements of a program rely on staffing structures, technology solutions, and data flow. As the available resources shift, so do the constraints and opportunities related to hedging. Automation of manual workflows, gaining or losing subject matter expertise within the treasury team, and increasing access to timely data can all be significant variables that could translate into a more effective hedging program.

Communicating the program

Hedging programs impact a wide array of stakeholders in an organization, including treasury, FP&A, accounting, tax, legal, and business units. Clear communication between stakeholders, from the definition of risk terminology through the orientation to recurring reports and expected results, can ensure a program that benefits the broader firm and can respond to needs that may arise from changes outside of treasury.

When is the right time to do a holistic review? Below are a few common indicators:

• If your hedging policy is no longer a relevant document for onboarding new hires because it doesn’t convey meaningful information
• If your program was data-driven in its design, but the original dataset is no longer directionally representative of your firm
• If key stakeholders would articulate their understanding of hedge program objectives differently
• If the treasury team spends more time fielding questions about what the program is not achieving than communicating its intended results
• If the people and technology tools available are materially different from the resources available at program inception

Companies’ needs will evolve at different rates and will factor in distinct sets of objectives and constraints. But the one constant element in a successful hedging program is the alignment of objectives, strategic and tactical decisions, and program communication.

Chatham Financial corporate treasury advisory

Chatham Financial partners with corporate treasury teams to develop and execute financial risk management strategies that align with program objectives. Our services include risk management strategy development, risk quantification, exposure management (interest rate, currency, and commodity), outsourced execution, technology solutions, and hedge accounting. We work with treasury teams to develop, evaluate, and enhance their risk management programs and to articulate the costs and benefits of strategic decisions.