Table of Contents Table of Contents
Previous Page  17 / 24 Next Page
Show Menu
Previous Page 17 / 24 Next Page
Page Background


Best Foreign

Exchange Solution


Budapest, Hungary

Diageo Group Treasury

FX risks addressed using rules-based benchmarks

Company profile

Diageo is a global leader in beverage alcohol with an outstanding collection of brands that includes Johnnie Walker,

Smirnoff, Baileys and Guinness. Its brands are produced from more than 140 sites around the world and are available

in over 180 countries.

The challenge

Diageo’s FX risk management policy focuses on three main sources

of FX risk: transactional (forecasted cash flows), balance sheet

translation and earnings translation. Diageo is continually focussed

on maintaining a FX risk management policy that meets its risk

management/corporate objectives, maximises cost efficiency and is

exemplary of current best practice.

The solution

In 2014, the group commenced the first stage of a comprehensive

review of its FX risk management practice with its banking partner.

This culminated in a revised policy being approved in Q215. It

resulted in a rules-based approach to hedging that reconfirmed and

improved the requirement to regularly monitor and analyse risk and

identifies key exposures to hedge.

Risk is viewed from a portfolio perspective in a Value at Risk (VaR)

based framework and relies on the monthly generation of portfolio

risk analysis for transaction and balance sheet FX. The analysis

measures the advantage of managing the exposures as a portfolio

rather than on a standalone basis and identifies a number of themes.

These include:

The exposures that create the most significant contribution

to risk.

The most cost-effective exposures to hedge.

Those exposures that reduce risk and should not be hedged.

Opportunities for cost savings through natural risk

reduction (diversification).

The review also identified additional offsetting exposures that could

be netted against each other and the group functional currency.

The effect of the new policy is to allow Diageo to reduce the number

of hedges it executes, lowering the cost of hedging, transactions and

internal administration. It has also improved risk reduction per GBP

spent on hedging.

The second stage to this project is the ongoing Review & Multi-Asset

Risk Management. Since 2016, the group has worked with its

banking partner on a feasibility study examining the quantitative and

qualitative benefits of Diageo managing both its FX risk and

commodities risk as one portfolio. This study has shown that further

risk reduction and cost savings are possible. This is now in a

benchmarking phase where actual executed hedging results are

compared to a modelled best practice benchmark strategy.

Best practice and innovation

Diageo’s continued process of review and evolution of policy

demonstrates best practice and innovation. Additionally, Diageo’s

sophisticated approach to portfolio risk management aims to be best

in class. Highlights from Diageo’s new policy defines a consistent

quantitative framework in which risk can be measured and

communicated to senior management. Overall risk limits, for a given

source of risk, can be set as well as limits for individual exposures.

The review of Diageo’s risk management practice did not cease with

the approval of the new policy in 2015. As part of that new policy,

Diageo assesses the effectiveness of its incumbent policy on an

ongoing basis. This continual assessment incorporates a forward

and backward looking review using both quantitative and

qualitative measures.

Diageo also measures itself against the best practices of its peers as

these change over time. Data and insight provided by its partners,

and their collaboration with a diverse group of the world’s largest

companies, enables this to happen.

Key benefits

Reduced the number and size of exposures hedged.

Reduced costs for hedging, transactions,

and administration.

Rules-based hedging policy ensures all stakeholders

understand hedging decisions in advance.

More effective risk management enables:

Greater predictability of costs and revenues.

Stronger focus on core business.

Better management of investor expectations.

Benjamin Gilbert, Citi collects the award on behalf of Diageo

treasurytoday Adam Smith Awards © August 2017 | 15