This blog post explores the complexities of foreign exchange (FX) risk management in the dynamic Asia-Pacific region. We interviewed former Treasury Manager at well known multinationals such as IBM and Lenovo, Damian Glendinning (DG), to discuss the key strategies to successfully operate in regions with volatile currencies and safeguard the business profit margins and manage FX risk.

Our host, Agustin Mackinlay (AM), Senior Financial Writer at Kantox, sat down with our treasury expert guest to get his insights. Check out some of the key takeaways from this episode.

The Fallacy of Exchange Rate Predictions

The conversation debunks the myth of accurate exchange rate forecasts. Treasurers, the financial professionals tasked with managing FX risk, acknowledge the inherent difficulty in predicting currency movements. Reliance on such forecasts often leads to poor decision-making.

Furthermore, exchange rates are unpredictable. Companies should be skeptical of self-proclaimed experts in FX markets—even within your organisation. Good FX management is about putting a solid process in place, knowing that the law of averages means you’ll end up being neutral over time. And there is also the risk of behavioural biases that skew their ability to make strategic decisions and not be affected by predictions of how the market is going to behave.

The role of the Treasury team

Another key point is the nature of treasury operations. The nature of Treasury changes with:

• the type of business;
• what you’re trying to achieve;
• how well you do it.
  ‍

As an example, Damian explains when Lenovo bought IBM’s PC business, it went from $4bn in revenue in China to $10bn in revenue in 175 countries. It was a big funding. but there were no accurate cash projections that clearly reflected the financial health necessary for this decisions. So in that case Treasury is all about cash management and banks relationship to negotiate prices.

For other companies in the same space, like the Microsoft and Intel finance teams, their big concern was wondering how they invest their excess cash.

But what all of them have in common is that for successful treasury management, there should be established procedures and risk tolerance parameters that the company follows.

FX risk management and different profit margins

The concept of FX sensitivity is introduced. Businesses with low profit margins and high exposure to foreign currencies are more vulnerable to exchange rate fluctuations. These businesses may require a more nuanced hedging strategy compared to those with higher profit margins.  In a business with 75% gross profit margins, FX management is not an urgent consideration. But with gross margins between 16%-20% and net margins around 5%, a 10% fluctuation in the exchange rate wipes you out.

When profit margins are thin, and the weight of FX is considerable, the cost of hedging becomes particularly important. Things to do in such cases:

1. rule out using currency options;
2. pay close attention to the cost of carry.

‍

By implementing these strategies, businesses in the Asia-Pacific region can effectively manage FX risk and protect their profitability in a dynamic and ever-changing market.

‍