Managing Euro FX Risk With Benchmark Data

• DOI: http://doi.org/10.1002/jcaf.21907
• Date: 01 November 2013
• Published date: 01 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