• currency exposures  


    Treasuries can no longer afford to manage currency exposures without considering the impact on the rest of the business. Jeremy Adam, Director, Client Derivative Structuring, at Lloyds Bank, discusses the importance of a more holistic view of FX risk.

    The 2008 financial crisis marked a seismic change in the way companies choose to hedge their Foreign Exchange (FX) risk. What’s striking is how many businesses are now wisely taking a more holistic view of risk and looking well beyond achieving specific FX rates. Treasurers are now understandably more alert than ever to the wider implications of their currency exposures. They now increasingly want to manage FX risk with a keen eye on how their strategy impacts such key metrics as credit availability, cash flow forecasting, shareholder value generation – in addition to accounting and regulatory issues.



    Supporting FX STRATEGIES

    When adopting an FX strategy, transparency and simplicity are priorities and that’s why many treasurers prefer straightforward products like forward contracts and futures. In today’s FX market flexibility is another prime concern. Arguably the ‘long view’ is now no more than three to six months. These uncertainties mean companies are now more focused on achieving known maximum hedge costs, minimum exposure to cash flow volatility and the preservation of optimal liquidity.


    But short-termism can create its own exposures. Waiting for potential risks to be resolved before instigating a hedge can leave you facing significantly different market levels on execution. Moreover, ranging FX rates don’t necessarily indicate stable markets; they can also mean that most are abstaining from market activity until a perceived uncertainty has reduced. One result is that fewer treasurers now see the cost of an option premium as prohibitive:after all, a company that buys an option has also purchased FX risk insurance.


    The advisory role of banks here is critical. They should be able to counsel clients not just on the short-term competitive gain of a particular strategy but also on the longer-term implications for the business. This is particularly true of businesses that don’t have the treasury and risk management resources of a FTSE 100 company at their disposal. To deliver this, banks must understand their clients’ needs. Clients now want accounting, regulatory, balance sheet and risk solutions expertise presented as a single resource, accessible at any time. Banks can usually offer a solution for a particular FX risk exposure, but they don’t all provide this holistic facility.


    Lloyds Bank has always had a good reputation for delivering integrated, seamless support, and today we back that service with state of the art technology. Our recently launched Arena trading, analysis and reporting platform is at the forefront of our channel enhancements. This innovative e-solution provides treasurers with customised finger-tip access to our FX and money markets expertise. More than a trading platform, Arena also delivers a wealth of insight and research on sectors, currencies and trends from our team of economists. We’re also continually investing in our own intellectual capital to make sure we provide our corporate clients with resources they don’t necessarily have in-house – and to add value to those that already do. The world has changed, and clients want appropriate coverage when they’re looking for growth outside of the UK, particularly in emerging markets.


    Today, more than ever, companies need risk management strategies thatalso focus on long-term survivability and opportunity. The appropriate and suitable use of FX derivatives are a fundamental part of that cost/benefit analysis and decision making process.


    To find out more about Arena visit  www.lloydsbankarena.com   

9/28/2020 10:02:49 PM