The Handbook of Corporate Financial Risk Management (2nd Edition)
First published:
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How to Develop Currency Risk Management Policy
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
In this chapter, we focus on the qualitative aspects of a currency (ie, FX) risk management policy. This has many themes in common with Chapter 9 on developing an interest rate risk management policy, in particular:
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company objectives, to determine a proper risk management policy, based on peers, but also including company specificities;
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the choice of risk management approach between conservative, aggressive and dynamic;
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risk management objectives, prioritising reduction of economic variability over the cost and accounting aspects;
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composition of derivatives portfolio, which is based on hedge accounting wherever possible;
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processes and organisation;
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derivatives risks introduced by risk management;
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limits on use of derivatives, which mitigate the derivatives risks;
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performance measures, which allow the company to monitor the success of its risk management programme; and
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benchmarking.
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We shall not repeat any of these common themes from Chapter 9, but instead focus on the aspects that are specific to currency risk. However, it is
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