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How to manage currency risk in times of volatility

Discover essential FX hedging strategies and currency management best practices from our foreign exchange experts.

How to manage currency risk in times of volatility

11 November 2022
3 min read
Agustin Mackinlay

When you are trying to weather the storm ahead, it is crucial to have a plan of action designed to fit your specific needs. Learn more about hedging strategies and how they can help you navigate the current volatile environment.In our latest episode of Currency Cast, we sat down with Kantox Country Manager for Italy, Eloisa Oliva, to discuss how businesses can leverage hedging strategies in times of high volatility.Here we provide some key takeaways that will help you overcome the challenges of underwhelming cash flow visibility and unexpected changes in exchange rates.

1. Avoiding the cliff

In recent times, we have seen sharp currency fluctuations, and the US dollar has become very strong, with some exchange rate charts looking like a cliff. The market volatility has made companies vulnerable to reduced cash flow margins. This also brings three interconnected challenges: FX volatility, shifting interest rate differentials and less-than-stellar cash flow visibility.Eloisa advised us on how to best overcome these challenges that increase currency risk. She suggests focusing on your business model and analysing your pricing strategy to find the best hedging strategy for your company.For this, you should first take a look at the frequency you set your pricing rates. Do you face dynamic prices? Do you keep fixed prices for an entire campaign period and ‘reprice’ at the start of a new period? Or on the other hand, do you need to keep prices as steady as possible not only for one campaign period, but for a set of campaigns linked together?This step will set the scene to choose the hedging programs that will help you reduce the FX volatility since you have tools to understand the effect of the currency fluctuations in your pricing.Once you have a better insight into your pricing structure, it's time to direct your focus towards the hedging programs. Have a look at how the hedging strategies that fit each pricing dynamic:

Dynamic pricing

Those companies with dynamic pricing will need to have a mechanism set in place that allows pricing to be automatically updated.

Stable pricing

For those companies with more stable pricing, their optimal hedging strategy should allow them to smooth the exchange rate.A layered hedging program would be the best option for companies in industries like fashion, publishing or consumer goods, where it is important to have a defined hedging policy that enables a stable rate period over period.Now, you can start implementing the right cash flow hedging program -or combination of hedging programs- that will help you achieve better cash flow visibility.

2. Embracing technology

After understanding the pricing structure in your company and finding the best program, you still have some heavy lifting to do. Treasurers and CFOs spend most of their time performing manual and time-consuming tasks to implement the hedging strategy, so they can't focus on becoming more strategic.For Eloisa, there is a way to improve workflows and avoid the heavy lifting of manually implementing the programs. By embracing technology, like a Currency Management Automation solution, they can automate the entire FX hedging process seamlessly. The currency management software would create a connection to the different financial systems - ERP, TMS, etc.- to make sure the exposure data flows with simple API calls, and it collects exposure while monitoring currency markets. This way you can, for example, protect the budget rate, or reach any of your FX policy goals.

3. Automating the hedging program

Eloisa had some interesting insights into how they can leverage technology to automate currency management. Because automation is not one size fits all. It can be designed to adapt to the specific configurations of each hedging program.Some programs, like layered hedging, require automation to take care of the high workload that comes when implementing timely hedges, which allows Treasurers to avoid the increased risk of manual error.But automation is also very useful for micro-hedging programs. Here, one of the main challenges is collecting the exposure information in a timely manner, which is solved by establishing a connection to the ERP.Check out our success case with Dulevo, a leading Italian manufacturer with operations in 80 countries and many sales in USD. After implementing a currency management solution like Kantox, they achieved €250k in reduced risk deviation and cut by 3 hours per week the time devoted to FX risk management.As Andrea Dioni, Dulevo’s CFO said “Thanks to Kantox, I am comfortable on the whole currency front and can devote myself to other strategic aspects of my job as CFO.”

Wrapping up

Whatever the scenario in currency markets, the levels of inflation, or the degree of precision in your forecasts, you have the tools -as a CFO or Treasurer- to tackle the main currency-related challenges of the very volatile world we are in.If you are worried about currency management in these volatile and unpredictable times, get in touch with our team for a free strategy session.

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Agustin Mackinlay
Agustin Mackinlay is a Financial Writer at Kantox. He has previously worked at an investment bank specialising in Emerging Markets. Agustin teaches several courses in Finance at LaSalle University and EAE Business School in Barcelona. He holds degrees from the University of Amsterdam and from the Kiel Institute of World Economics in Germany.
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