Companies Weigh Currency-Hedging Strategies Amid Coronavirus Market Turmoil

The pandemic has put finance chiefs’ liquidity plans to the test

A digital board displayed exchange rates at a currency exchange office in Moscow this week.

Photo: Sergei Fadeichev/Zuma Press

Finance chiefs are reviewing currency-hedging strategies to manage liquidity as widespread volatility spurred by the coronavirus pandemic spills over into foreign-exchange markets.

28365365体育投注The stress has put CFOs’ liquidity plans to the test, and wild fluctuations in exchange rates mean companies with even minimal international operations could face significant currency exposure.

The U.S. dollar has seen big swings amid the market upheaval tied to coronavirus fears and as investors evaluate the outlook for global interest rates in the wake of a recent rate cut by the Federal Reserve.

The WSJ Dollar Index, which tracks the dollar against a basket of major currencies, took its biggest dip—0.6%—since June on Monday, when U.S. stocks plummeted and the Dow Jones Industrial Average had its worst day since 2008. But on Thursday, the index rose 1.1% to $91.80, while the Dow Jones index posted its worst percentage drop since 1987.

Global stocks around the world plunged Thursday along with U.S. markets, which could lead investors in commodity-tied currencies to safer assets such as the Swiss franc and the yen and spur more sharp shifts in foreign-exchange markets.

28365365体育投注In currency hedging, companies enter into derivative contracts in an effort to remove their exposure to volatility in exchange rates. Swings in foreign-exchange markets can either hurt or help a company’s earnings.

“For many companies, the visibility of future earnings has gotten very foggy,” said Helen Kane, chief executive of consulting firm Hedge Trackers.

By choosing not to hedge, a company can be more susceptible to unpredictable financial performance.

Companies usually set cash-flow hedging strategies at the start of the year and generally don’t need to update them. But the disruption in forecasts may require companies to rethink their strategies. Companies that already have a hedging program will likely count on it to smooth the coronavirus’ impact on their liquidity and cash flows. Those that don’t hedge could consider doing so to protect against losses, said Sharon Virag, retired finance executive who served as CFO of biotechnology company NeoGenomics Inc. and accounting chief for Aetna Inc.

28365365体育投注CFOs need to think through their companies’ exposure and challenge assumptions about their overseas liquidity plans and currency-hedging projections, Ms. Virag said.

Inc.28365365体育投注 hedges foreign currency exchange risk as a way to protect against unfavorable movement in the euro or pound against the U.S. dollar, Christopher J. Masterson, CFO of the New York-based real-estate investment trust, said Thursday.

“The strategy is employed by layering in cash flow hedging instruments, primarily FX forwards, over a forward-looking three-year period in order to fix exchange rates for the conversion of pound and euro net cash flows into U.S. dollars,” Mr. Masterson said.

28365365体育投注FM Global, a Johnston, R.I.-based mutual insurance company, is monitoring the pandemic before changing its currency hedging strategy. If the company starts to see a spike in the number of insurance claims related to communicable diseases in a jurisdiction where it didn’t have premiums in the same currencies, for instance, the company is more likely to pursue hedging, Kevin Ingram, FM Global’s finance chief, said Wednesday.

NV, a German metasearch platform majority-owned by Expedia Group, is also waiting to determine whether the impact of the virus on its business warrants a currency play. The company would begin to hedge if revenue, excluding marketing expenses, from the Americas were to rise to the level of Europe, its primary market, Matthias Tillmann, Trivago’s CFO, said Thursday.

28365365体育投注“If we get to a level more similar to what we have in Europe, then we need to think about it and then we need to start hedging that way,” Mr. Tillmann said.

28365365体育投注If the market volatility continues, companies that don’t start hedging could be in trouble, Ms. Kane said. For example, manufacturers sourcing materials internationally and selling products domestically could see profit margins disappear, especially if the products are for sale in U.S. dollars.

28365365体育投注“Gross margin is where companies first learn the lessons—sometimes very harsh lessons—why they need to hedge,” Ms. Kane said.

Write to Mark Maurer at mark.maurer@txbbqking.com

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