Companies don't have a good grasp of what's going on in their foreign exchange (FX) processes, and most don't have plans to change that fact in the near future. Those are the key results of a series of polls conducted during a recent Treasury & Risk webcast.
Among the 121 survey respondents, more than 40 percent said their FX risk management processes have "blind spots"—areas in which they don't have visibility into FX exposures—and more than 20 percent said they don't know whether they have blind spots. (See Figure 1, below.) This is a somewhat alarming statistic, and companies should be paying heed, according to Andy Gage, vice president of strategic market development for FiREapps.
"The fact that 64 percent of the polled corporates are either unsure or said 'yes' to having blind spots is not overly surprising, but it is dangerous," Gage says. "Corporates with a blind spot do not have a full grasp on what could present itself as a surprise—positive or negative—and thus do not have all of the information they need to effectively manage currency risk inside their business."
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Perhaps as a result of those blind spots, the vast majority of respondents indicated that their company's focus on FX exposure management is growing, and they expect that trend to continue over the next year or two (see Figure 2, below). They see a lot of room for improvement, and think they could reap all kinds of benefits by tightening up FX exposure management.
For example, 62 percent of poll respondents said they need to improve the accuracy, completeness, and/or timeliness of the data they use in defining FX exposures, and 55 percent said they need to improve the analysis and reporting capabilities of their treasury and finance teams. Many also see opportunities to improve operational efficiency, either by automating manual tasks (60 percent of respondents) or by integrating disparate technologies into a straight-through process (41 percent). Finally, 43 percent of respondents said that improving FX exposure management would enable them to better identify natural hedges and eliminate exposures organically. "Whether a company intends to hedge a risk or not, the first requirement of any effective currency risk management process is complete visibility into all sources of exposure," Gage points out.
It may come as a bit of a surprise, then, that only 35 percent of respondents said their company is considering upgrading its FX exposure management processes within the next two years. But Gage expects movement in the currency markets to increase companies' interest in managing their FX exposures more carefully. "Our previous experience with a strengthening dollar is that as the effects of a rising dollar are felt—especially in U.S. multinationals with a basket of currencies—the number of companies feeling both internal and external pressure to gain better visibility also rises," he says. "We expect to see more and more pressure on multinationals from a number of angles as the U.S. dollar strengthens against their other currencies. It's also worth noting that we do not see this [dollar] trend stopping anytime soon, as a number of banks around the world are calling for the dollar to strengthen even further against the euro."
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