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Stuck on hurdle track towards better FX management?

Numerous banks and FX brokers promote FX forwards and other more complex solutions to their business clients, aiming for improved currency risk management. However, they frequently overlook a crucial step in their quest for increased transactions: educating their clients on the genuine benefits of FX hedging for their business. Consequently, this often leads to cognitive dissonance among clients, who believe they are mitigating FX risks yet feel they are still gambling.

These "market experts" impress their clients with elaborate market updates that, unfortunately, offer no real insight into the future direction of FX rates. They introduce various solutions, including FX market orders or even intricate structured products, which are highly attractive to potential clients in their pursuit of market outperformance. However, this promise is frequently unfulfilled, leading numerous finance directors and managers to become sceptical about the merits of proactive FX management.

The reality for hundreds of finance teams in large enterprises, especially those with seasoned treasury teams, diverges significantly due to HOW they focus on managing FX risks, among other responsibilities. Why is this the case? They prioritise aspects under their control, minimising decisions heavily influenced by market rates for improved strategic outcomes.


Do these three things if you want to get FX risk management right:

1. Set specific goals

Take time to discuss among senior management (or even with your board) specific objectives for your FX risk management. Why do you need it? What metric would you use to measure results?  Getting a good rate is not objective - it is too vague and subjective unless you have 20/20 hindsight.  Reducing FX impact on margin or income and stabilising cashflows can be measured and, more importantly, have meaning that can be explained to anyone in your company.

2. Organise your data and process

The principle of "garbage in equals garbage out" holds true: precision isn't everything in FX risk management, but getting the big strokes right is crucial. Instead of striving for perfection in every single cash flow, it's often more advantageous to hedge even based on partial information than to delay action waiting for perfect data. However, capturing the overall picture and safeguarding against poor data is essential. This is a common concern among group treasurers, who frequently receive inaccurate data from disparate sources. Establishing a data validation process early on can save countless hours down the line.

3. Start with a simple routine hedging policy

Don't overthink and start with simple hedging policy that you can improve over time. Armed with goals and data, you will be miles ahead of 90% of your peers in making better hedging decisions.  Choosing the right instruments, amounts and period length for the transaction and, more importantly, when to transact becomes a lot simpler when you have the clarity of your objectives and data to make the decisions.

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