Source: www.deloitte.com
Topic: Foreign Exchange
Sort Desciption: Audit . Tax . Consulting . Financial Advisory . Treasury and Capital Markets With the recent volatility in currency markets and in particular the weakness of the US Dollar, many companies are again ...
Content Inside:
Audit . Tax . Consulting . Financial Advisory .
Treasury and Capital Markets
With the recent volatility
in currency markets and in
particular the weakness of the
US Dollar, many companies are
again revisiting their foreign
exchange risk management
strategy.
Before entering into any
financial instrument,
companies firstly need to be
clear on what they are aiming
to achieve from a hedging
strategy. Only then should
derivatives products be
considered.
What is my risk?
There are two basic types of foreign
exchange risk:
1. Transactional risk
2. Translational risk
Transactional risk involves actual flows of
cash in the future, for example an export
or an import. Translational risk involves the
foreign exchange difference experienced
when re-converting a foreign exchange
value into the functional currency of the
company concerned. The translation may
bein respect of earnings, costs, assets or
liabilities. Frequently translation risks turn
into transaction risks at a later date as
earnings are repatriated or assets and
liabilities realised.
The hedging decision
The first step in any hedging strategy is to
be very clear on two questions:
1. The size of it - is the risk big enough to
cause an issue?
If the answer is yes then answer:
2. What are you actually trying to achieve?
Once you are clear on these questions,
you are then able to consider possible
approaches to mitigating these risks, some
of which may include entering into financial
instruments with banks.
How much risk can you take?
The approach most appropriate for you will
depend on a number of factors, however
the one key factor is that the strategy is
consistent with the risk appetite of the
Board. As with many risks such as insurable
risk, companies choose to accept some risk
and lay off other risks with third parties; the
same holds true with foreign exchange risk
management. The strategy must be
consistent with the Boards expe ...
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