Benchmarking Treasury for Shareholder Value

6 Treasury and Trade Solutions Managing Cash Flow Uncertainty: Are options the new norm? Along with the inability of 45% of survey respondents to quantify their FX risk in their TMS system, 81% of corporates surveyed follow a rolling, static, layered or opportunistic approach toward hedging forecasted exposures. Moreover, any hedging programs continue to be short term in nature: Most companies focus on a three-to six-month outlook because of lack of visibility and connectivity. As a result, the number of companies realizing significant economic and risk-reduction benefits is limited. Over half of the respondents reported analyzing hedging performance on a monthly basis. In terms of hedging tools used, there has not been a big shift in client behavior in recent years. Spot, swaps and forwards remain the most commonly permitted financial instruments. But approximately half of survey respondents also allow option-based strategies despite relatively low FX volatility. One possible driver for this is corporates’ eagerness to retain flexibility. Many experience challenges in cash flow forecasting and visibility and are consequently concerned about missing targets and taking P&L losses because they may have hedged for the wrong duration or currency. Options offer a way to mitigate such challenges (Figure 7) . Figure 7: Managing Currency Risk: Tools determined by policy Figure 6: Risk Management: Timing for undertaking policy reviews Treasury Policies: Are objectives aligned with practices? In the past, there has been a tendency for treasury policies to lag technological, geopolitical, macroeconomic or other developments. This no longer seems to be the case: 91% of companies surveyed reported having a formal written FX policy in place, while 71% of respondents indicated that their policies are reviewed at least annually and/or during significant market movement or M&A transactions (Figure 6) . This more timely and holistic approach — looking at the consequences of FX on company or industry-specific key performance indicators — reflects a significant change from past behaviors. Many clients are also investing in new TMS solutions to ensure they have the infrastructure in place to manage, understand and link policies with practices and actions. While companies are becoming more effective at aligning policies and practices, their key risk management objectives remain similar to those of the recent past. A total of 63% of companies reported reducing earnings and cash-flow volatility as a key risk management objective. However, just 12% of respondents directly hedge earnings translation exposures. For some companies, hedging may be unnecessary as they have limited FX exposure. But this is not the case for the vast majority of companies. One possible explanation for the low rate of hedging is relatively low FX volatility in 2018; FX was not widely seen as a salient factor in earnings-per-share targets and therefore largely ignored. If volatility increases in the future, the scale of hedging may correspondingly increase. Frequency of Treasury Policy Reviews Policy-Permitted Financial Instruments At least annually At least annually and during significant market movement or an M&A transaction Less frequently than once per year Spot Forwards Swaps FX Options - Zero Cost FX Options - Premium Payable “A board-instigated policy review is a priority this year. An important driver is to ensure FX policy is aligned with the firm’s broader risk management objectives.” — European Treasurer 88% 87% 82% 46% 45% 29% 22% 49%