European corporations have undergone significant turbulence in their overseas business activities as a result of recent geopolitical events – notably Brexit and the Trump election. Equally, ‘black swan’ or 1 in a 100 year events, seem to be happening more frequently in the minds of corporate treasurers. However, many appear to be acting too late to mitigate the financial risks.
I recently carried out research for a CME Group commissioned bespoke report, examining the challenges German corporate treasurers face in managing financial risk. Over 54 German corporate treasurers were approached as well as 15 hours of desk research carried out. To share my conclusions, I found treasurers were concerned by the following issues:
- How to refine their international strategy and likely future acquisitions / disposals of assets their business will make
- Reducing funding cost by repaying debt
- ‘Releasing trapped cash’ in overseas accounts
- Safeguarding earnings values, they don’t want to repatriate as yet
- Taking advantage of currency changes to expand in core markets
The main challenges and thoughts treasurers put forward to us, was that hedging such risks was commonly dealt with late on in any strategy and thus, treasurers appear to feel that they need to consider the strategy much sooner and appropriate tools to use to gain an opportunistic price advantage.
Also noted was, managing FX risk is only one element of a treasurers role and as such, they need to balance the time and resource required to manage FX positions alongside other key responsibilities, such as cash management and funding.
Finally, given continued currency fluctuations, treasurers believe a sophisticated plan is required to perform the required market interventions at the best available rates, in compliance with the organisation’s financial risk management policy. Changing financial risk management practise, such as switching from an OTC strategy with a bank to FX futures, is subject to the usual ‘change resistance’ and ‘career risk’ concerns in doing so.
In summary, in a time of geopolitical volatility and general market uncertainties, treasurers need to be much better prepared to make important operational switches if financial risk management is optimised.
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Post by Noel Hillmann, Managing Director, Clear Path Analysis. Contact Noel.
