Benchmarking Treasury for Shareholder Value

7 Benchmarking Treasury for Shareholder Value Figure 8: Hedging Approach to Managing Emerging Market (EM) Currencies Figure 9: Managing Risk: Netting exposures across entities Emerging Market and G10 Risk Management: Should they be differentiated? While 62% of respondents to the survey reported having exposures to currencies outside the G10, 75% of them indicated that they either hedge emerging market and G10 exposures to the same extent, or essentially do not hedge emerging market exposure. For some companies, this is because emerging market FX exposure is insignificant. However, a large number of companies continue to expand their balance sheet into emerging markets. What is preventing these companies from hedging FX risk to a greater extent? Cost, market liquidity and local regulatory considerations were cited as primary concerns by respondents when considering managing emerging market currency risk (Figure 8) . Citi is working closely with clients to help them differentiate between G10 and emerging market FX exposure to a greater extent. This should enable clients to more effectively manage their risks and adapt their hedging strategies and practices to best suit various markets. Centralization of Cash and Risk Remain Key: Where are the opportunities? 80% of the companies surveyed reported managing risk on a centralized basis using constructs such as netting, in-house banks and shared service centers. However, perhaps surprisingly, more than half of respondents have no intercompany netting process, which acts as a natural risk management technique by netting exposures across entities. Even among those firms that do this, only 54% include more than 75% of intercompany flows in their netting system. For many companies, the absence of an intercompany netting process (or its limited use) is a significant missed opportunity. Similarly, almost 50% of respondents currently use an in-house bank demonstrating that while familiarity with these constructs and their potential benefits is now widespread, many companies have yet to deploy such models. Even those that have deployed in- house banks are often failing to utilize them to their full extent (Figure 9) . Hedging Approach to Managing Emerging Market Currencies Implementation of Intercompany Netting Process Percentage of Intercompany Flows Participating in Netting System Level at Which Risk is Managed 78% All currencies hedged the same G10 currencies hedged; EM currency risk not hedged G10 BS exposures hedged 100%; EM hedged very selectively/not at all Forecasted EM risk hedged but for shorter tenors than G10 More options used for EM risks to avoid negative forward points 25% or less 26-50% 51-74% 75-94% 95% or more 16% 16% 14% 30% 24% Centralized Local Regional 49% 18% 11% 18% 6% 48% 52% 80% Yes No 11% 9%