Le magazine du trésorier - n°76 - 4ème trimestre 2011 - (Page 34)

CORPORATE FINANCE Another way to hedge FX exposure Currency volatility remains very high since September 2008 and the “currency war” does not seem on the way to stop, what is your opinion on this issue? Firstly, I think that it is important to understand that the world has definitely changed. The U.S.A. are no more the only economic leader. China but also India or Brazil keep growing at a fast pace. It is really becoming a multipolar world in which the USD will not remain the only reference currency in a near future. Secondly, with close to USD 4 trillion exchanged daily, it is obvious that the FX market is more and or more disconnected from the “real economy” (companies exporting and importing goods and services) and that speculation keeps growing. Furthermore, the recent quantitative easing has added even more liquidity in the market. In a nutshell, for several years, I think that there is a stratospheric amount of liquidity in the market and not enough “attractive” and profitable productive assets to invest in (companies, start-ups, etc.). In this context, a large share of liquidity is invested in short-term speculative assets: currencies, gold, real-estate, etc. creating quick bubble-burst cycles. Last, I think that China might be the “game-changer” in a near future. On one side, because of the convertibility of the Renminbi (Yuan). On the other side, because the burst of the China real-estate bubble; I had the opportunity to visit China last year and think it is the largest bubble in the history of mankind; might deeply impact the global growth. In such a context, it is less and less (no more) possible to forecast currency movement over the short, mid or long-term and no one knows if the currency war will end. How are companies impacted by currency volatility? Nowadays, most companies - large, medium or small - participate in the globalization process and are directly or indirectly impacted by currency volatility. Large ones, with knowledge in-house and resources, are able to manage FX risk; even if there are a lot of examples of multinationals with huge financial losses due to currency volatility. SMEs are generally not well prepared to manage FX risk and the profitability of their foreign operations mainly depend of the exchange rates movements. In such a context, going overseas is a complicated task. It requires not only focusing on your core business, on producing, on selling, etc. but also on managing FX risk, credit risk, etc. In your opinion, how should companies hedge their FX risk? No use saying that the best way is to develop a « natural » hedge strategy - in this case I am speaking about transaction risk - it means netting outflows and inflows in foreign currencies. Nevertheless, few companies are structured in such a way that they can develop this kind of strategy. In a general manner, and because of FX risk, I think that companies going overseas should focus more on profit margin than on revenues or production cost, even if they are correlated. It means, as example, going overseas to increase revenues should be done only if you are sure that these additional revenues will increase your profit margin. It can be because you have a high enough gross margin that you are confident that if exchange rates movements negatively impact your foreign revenues you will go on making profits on these revenues, or because you can afford the cost of hedging. When the Renminbi (Yuan) will start being fully convertible, how 34

Table des matières de la publication Le magazine du trésorier - n°76 - 4ème trimestre 2011

Sommaire
EDITORIAL - Over and over and over again
FINANCIAL HIGHLIGHTS
INTERVIEW - Jean-Louis Bertrand, Co-fondateur de METEO PROTECT
FOCUS
FORUM OF ADVERTISERS
CORPORATE FINANCE
TREASURERS' ASSOCIATIONS
NEWS

Le magazine du trésorier - n°76 - 4ème trimestre 2011

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