A 4-point roadmap to handle FX market volatility

The 'flash crash' in GBP on the morning of Monday, September 26 —when the GBP-USD exchange rate tumbled by more than 3.6% to 1.0370, having closed at 1.1254 just two trading days before— sent shockwaves across FX, money, credit, equity and commodities markets the world over.

At one point, measures of currency volatility reached levels not seen since the worst days of the pandemic. While some of those markets have subsequently recovered, CFOs and treasurers need to be prepared for more bouts of currency volatility.The most pressing question is: are risk managers in possession of the right tools to effectively handle such episodes? Here's a list of four actionable points to consider as you ponder your FX risk management strategy:

(1) Start by taking FX risk out of the equation.

Based on the pricing parameters of your business, select the best hedging program to effectively remove currency risk. Your goals may include: defending a dynamic pricing rate, removing the accounting impact of FX gains and losses, defending the budget rate for a particular campaign, or smoothing out the hedge rate over time.

(2) While hedging, actively manage interest rate differentials.

As central banks worldwide act to keep inflation in check, you can take advantage of shifting interest rate differentials by using conditional FX orders to delay hedge execution when forward points are not in your favour, or you can anticipate hedging when they are.

(3) All the while, do not fret about impaired visibility.

While effective FX risk management does require a certain degree of automation, it does not require perfect forecasting accuracy. This is due to the nature of the exposure (when committed transactions are hedged) or to hedging techniques that use conditional orders and/or layered hedging (when forecasted cash flows are hedged).

(4) Finally, embrace currencies.

Forcing a handful of currencies like USD or EUR onto customers and suppliers does not eliminate FX risk. The resulting pricing markups only add to the cost of doing business. With FX risk under control, you can profit from the margin-enhancing opportunities of selling in the currency of your customers and/or buying in the currency of your suppliers.Technology allows risk managers to handle the interrelated challenges of a ruthless financial environment that throws difficulty after difficulty. In this volatile scenario, CFOs and treasurers can rest assured that no bad surprises will come from the FX side of the business — whatever happens in currency markets.