Managing Euro FX Risk With Benchmark Data

DOIhttp://doi.org/10.1002/jcaf.21907
AuthorStephen Makar,Li Wang
Date01 November 2013
Published date01 November 2013
43
© 2013 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.21907
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Stephen Makar and Li Wang
Prompted by
the financial
crisis, central
banks have offered
unprecedented sup-
port for the global
economy since 2007.
A primary concern of
chief financial officers
(CFOs) and others
during this period
has been the manage-
ment of euro foreign
exchange (FX) risk
(Deloitte, 2012a). One
year ago, the Euro-
pean Central Bank
addressed these FX concerns
by promising “to do whatever
it takes to preserve the euro”
(Draghi, 2012). In June 2013,
the Bank for International
Settlements (BIS) warned
companies against continu-
ing to rely on central banks
to do whatever it takes, and
strongly encouraged compa-
nies to “make the most of
the borrowed time that policy
accommodation has provided”
before such monetary policy
is normalized (Caruana,
2013, p. 8).
Prompted by the financial crisis, central banks
have offered unprecedented support for the global
economy since 2007. But a primary concern of
treasurers remains: How do you manage euro for-
eign exchange (FX) risk? So treasurers worry about
the uncertainties: When and how will monetary
policy be normalized? How will FX rates respond?
And what information is needed to manage the
accompanying FX risk prudently? The authors of
this article help readers by providing benchmark
data pertaining to euro FX risk management. They
also explore the strategic implications of the data.
© 2013 Wiley Periodicals, Inc.
Managing Euro FX Risk With Benchmark
Data
Today’s companies face sig-
nificant near-term uncertainty
in the global economy. When
and how will monetary policy be
normalized? How will FX rates
respond? What information is
needed to manage the accom-
panying FX risk prudently? We
guide the efforts of CFOs and
treasurers in making the most
of borrowed time by providing
benchmark data pertaining to
euro FX risk management. We
also consider the strategic impli-
cations of such data, in relation
to recent JCAF articles.
FX RISK AND HEDGE
TECHNIQUES
In a 2013 JCAF
article, “Snapping
Up Euro Bargains
With Trapped
Cash,” Le Guyader
expresses surprise
at the lost strategic
opportunity to invest
excess euro cash
and create nonfi-
nancial FX hedges
in Europe. In these
nonfinancial hedges,
FX-denominated
assets are aligned with sales,
such that changes in the U.S.
dollar/euro FX rate have offset-
ting effects on the correspond-
ing cash outflows and inflows.
Similarly, companies can use
financial hedges, such as FX
derivatives, to manage their
exposure to FX rate changes.
We provide benchmark data on
both financial and nonfinancial
hedging by companies that iden-
tify the euro as the currency to
which they are most exposed.
The data come from our analy-
sis of nearly 300 annual reports

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