Like ADC, many companies are finding that turbulence in the currency markets requires new tools and tactics. It's easy to say more volatility calls for tighter hedging, but in forward-looking hedging programs, it's a real challenge to know what to hedge when forecasts are fogging up due to faltering operations, says Beth Neesham, Philadelphia-based managing director and FX trader at PNC Capital Markets. "You can't hedge the exposure that will be created by a manufacturing plant in Mexico if you don't know what the production at that plant will be." The net result of that fogginess was a dramatic drop in FX hedging activity in the fourth quarter of 2008 and the first quarter of 2009, she points out.

With so much uncertainty about exposures, treasuries have shortened the duration of their hedges, reports Chris Bond, a managing director at HSBC Securities USA. "They're hedging more frequently for shorter periods and then rolling over the hedges to cover known exposures. They're executing strips of forward contracts that ladder in hedges over different maturities. And many are moving to outright currency options because of the tight credit markets." Longer-maturity forward contracts result in a higher rate of credit utilization, Bond explains. And treasurers don't want to over-hedge for fear of not qualifying for effective hedge accounting under FAS 133 rules. Not qualifying could create a potential cost, he notes.

"The volatility of currency movements and the impact on financial results come at a time when the operating environment is already difficult," says Phillip Harrison, managing director for FX sales and trading at SunTrust Bank. "Boards are asking questions they don't usually ask."

"A lot of companies are reviewing the effectiveness of their FX risk management programs," Harrison says. "They may have policies that approve the use of certain instruments, but now they're getting outcomes they didn't expect. So they're getting help in reviewing those policies and making adjustments."

Currency hedging has also been complicated by concerns about counterparty risk. "Treasurers didn't know which banks to deal with last fall, which contributed to the pullback, but things are returning to normal," albeit at lower levels, Neesham says.

The push to tap liquidity has increased companies' interest in repatriating funds held overseas, Bond says, and raised the value of protecting those funds from losses resulting from exchange rate fluctuations.

For currency hedgers, it has been a rough ride. Through the first half of 2008, the dollar was relatively weak and companies with overseas operations were enjoying strong translation gains from overseas revenue that wasn't hedged, Bond reports. Then the crisis set off a flight to quality that sent the dollar higher. "Many treasuries were unprepared for the speed and extent of the U.S. dollar rebound, and many took a double hit" as the exchange rate moved against them and revenue dropped when overseas sales softened because of the recession, he says.

But once treasuries gain confidence in the size of their exposures, they "want to remove any uncertainty due to currency fluctuation and lock in a sure thing," Neesham notes.

Rather than return to normal, treasury staffs need to rethink their whole approach to currency risk management, argues Wolfgang Koester, CEO of FiREapps, the Scottsdale, Ariz., provider of foreign exchange exposure management services. Decision-makers should consider the potential impact, not the raw exposure, he insists. "A gross exposure might be $300 million–you might be long that much to a particular currency," he illustrates. But depending on the currency, the potential impact on the company's revenue would be far less, perhaps $42 million, he suggests. "Then you consider how much to hedge and what it will cost you, perhaps a cost of $400,000 to reduce the $42 million potential impact to $18 million," Koester continues. "Then you should ask if that is the best way to spend that money, and typically the answer will be 'No.'"

Treasury staffs are trained to look for the largest gross exposures, not the largest actual risks, he says. "It's not unusual for a company to identify its six largest gross exposures and then spend the money hedging them. If they had complete visibility and analytic capability, they might see and address the ones that posed the greatest risk." Technology is now making that possible, Koester argues, and helping treasury staffs to see which hedges are really worth the cost and which ones are not.