Discover how this company reduced their hedging costs and protected their margins to prepare
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CurrencyCast is a treasury podcast series from currency management experts. In each episode, we look at the pressing foreign exchange (FX) risk issues facing treasurers and CFOs today and help them identify the potential gaps in their FX risk management strategy.

FX Lessons from Merck & Hermès: How Finance Teams Fuel Success (S8 E6)

July 3, 2024
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Unveiling the FX Strategies of Billion-Dollar Brands

In the competitive world of international business, foreign exchange fluctuations can make or break your bottom line. Managing currency risk is no longer just for the giants; it's a key strategy for businesses of all sizes.

This blog post dives into successful foreign exchange (FX) risk management strategies, using the examples of two European powerhouses: Merck, a leading pharmaceutical company, and Hermès, a renowned luxury goods brand.

Why Merck & Hermès?

Despite operating in vastly different sectors, both Merck and Hermès share a common thread – a commitment to robust FX risk management strategies. These well-established companies, with market capitalisations in the billions, haven't achieved their success solely through scientific breakthroughs or exquisite craftsmanship. Their finance teams play a vital role, particularly in mitigating the risks associated with currency fluctuations.

Learning from the Masters: Unveiling FX Strategies

Merck's Meticulous Approach:

Discipline is key. Merck avoids speculation with systematic hedging and maintains a clear separation of duties within their finance team. We argue that planning ahead is also paramount for the Pharma powerhouse. Here is a possible explanation to how they manage their FX risk:

  • Balance Sheet Hedging:  They play it safe by fully hedging all FX-denominated receivables and payables, eliminating the impact of currency fluctuations on their profit and loss statement.
  • Cash Flow Hedging:  Planning ahead is paramount. Merck implements a layered hedging program, strategically mitigating risks by hedging forecasted foreign exchange revenue and expenditures up to 12 months in advance.
  • Firm Commitment Hedging:  No loose ends here. They ensure firm sales and purchase orders are hedged, providing an extra layer of protection.

Merck also provides detailed information about FX hedging programs to investors, possibly to convey a sense of discipline and commitment to protecting profit margins and achieve optimal disclosure (not too little, not too much information).

Hermès' Artful Hedging:

While concrete details about Hermès' FX strategy are limited, we can glean valuable insights from their financial statements and industry best practices. Here's a possible framework:

They likely employ a strategic hedging program that utilises conditional stop-loss orders to shield themselves from worst-case FX scenarios during each budgeting period. And Hermès might leverage several tactics to outperform budgeted profits combining it with a micro-hedging program, including:

  • Forward Points Management:  Imagine getting a discount on raw materials! They do this by strategically hedging purchases like silk (imported from Brazil) at a favorable forward rate, they can squeeze out extra margins.
  • FX Markup:  Building a buffer into their budgets, Hermès might use less favorable exchange rates when setting budgets, anticipating potential currency fluctuations.
  • Hedging Firm Commitments at Favorable Rates:  They likely hedge firm sales and purchase orders at better rates than the worst-case scenario used in pricing, maximising profit potential.
  • Take-Profit Orders:  Not just about protection, Hermès might also set take-profit orders alongside stop-loss orders. This allows them to capitalize on favorable currency movements, potentially boosting their profits.

The Secret Ingredient: Technology and Teamwork

Both Merck and Hermès likely rely on a robust technology infrastructure to support their FX risk management strategies.This includes integrated systems like Enterprise Resource Planning (ERP) and Treasury Management Systems (TMS) that provide finance teams with seamless access to all relevant information.

Additionally, automated execution streamlines the process of swap execution and simplifies the complex calculations involved in hedge accounting. Finally, maintaining end-to-end traceability is crucial for ensuring transparency. Each transaction, from initiation to completion, should be assigned a unique reference number to facilitate clear auditing.

Beyond Billion Dollars: The Importance of FX Management for All

The success stories of Merck and Hermès illustrate the importance of a well-defined FX risk management strategy. Regardless of your company's size or industry, taking control of currency fluctuations can significantly impact your bottom line.

Key takeaways:

  • Develop a Structured Approach:  Create a clear FX risk management strategy tailored to your business needs.
  • Embrace Hedging Tools:  Explore various hedging options to mitigate currency risks.
  • Leverage Technology:  Invest in technology solutions that streamline FX management processes.
  • Seek Expert Guidance:  Consult with FX specialists to develop a comprehensive risk management plan.

By taking inspiration from the strategies of billion-dollar brands and implementing best practices, you can unlock hidden profits in your own business and navigate the ever-changing world of foreign exchange with confidence.

What Next?

Ready to take control of your FX risk? Let's discuss how to develop a winning FX management strategy for your business! Check out how Kantox's automated solutions work.

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