The Handbook of Corporate Financial Risk Management (2nd Edition)
First published:
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Introduction to Currency Risk
Introduction to Currency Risk
Foreword
Introduction
Theory and Practice of Corporate Risk Management
Theory and Practice of Optimal Capital Structure
Introduction to Funding and Capital Structure
How to Obtain a Credit Rating
Refinancing Risk and Optimal Debt Maturity
Optimal Cash Position
Optimal Leverage
Introduction to Interest Rate and Inflation Risks
How to Develop an Interest Rate Risk Management Policy
How to Improve Your Fixed-Floating Mix and Duration
Interest Rates: The Most Efficient Hedging Product
Do You Need Inflation-linked Debt?
Prehedging Interest Rate Risk
Pension Fund Asset and Liability Management
Introduction to Currency Risk
How to Develop Currency Risk Management Policy
Translation or Transaction: Netting Currency Risks
Early Warning Signals
How to Hedge High Carry Currencies
Currency Risk on Covenants
Optimal Currency Composition of Debt 1: Protect Book Value
Optimal Currency Composition of Debt 2: Protect Leverage
Cyclicality of Currencies and Use of Options to Manage Credit Utilisation
Managing the Depegging Risk
Currency Risk in Luxury Goods
Introduction to Credit Risk
Counterparty Risk Methodology
Counterparty Risk Protection
Optimal Deposit Composition
Prehedging Credit Risk
xVA Optimisation
Introduction to M&A-related Risks
Risk Management for M&A
Deal-contingent Hedging
Introduction to Commodity Risk
Managing Commodity-linked Revenues and Currency Risk
Managing Commodity-linked Costs and Currency Risk
Commodity Input and Resulting Currency Risk
Offsetting Carbon Emissions
Introduction to Equity Risk
Hedging Dilution Risk
Hedging Deferred Compensation
Stake-building
Foreign exchange (FX) is the primary corporate hedging activity, whether in terms of the number of transactions, volume or human capital and other resources devoted to it. The reason for this is simple: some companies may elect not to hedge their interest rate risk because its size is not material (for instance, a low-leverage corporate). However, we have never come across a corporation with foreign exposure that doesn’t deal with its currency risk. Basically, FX affects all aspects of corporate financials: cashflow, earnings, assets and liabilities. Therefore, FX influences all key performance indicators, from profitability to creditworthiness. The degree of importance of FX risk management also varies across sectors, from tactical to strategic – it depends on the company’s ability to pass the currency variation to suppliers or customers, and if it can do so better than its competitors.
Key features impacting the FX risk are the length of the production cycle, and the mismatch between the currency of sales, cost of sales and debt. Whatever the nature or consequence of FX risk, a corporate hedging policy has the same goal across all industrial sectors: to support the business by
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