Asian Corporates Cite FX as Biggest Financial Risk Concern

Asian corporates and CFOs cited FX risk as the financial
risk that they are most concerned about, according to a new survey from Thomson
Reuters and Asset Benchmark Research.

In the report accompanying the research results, it notes
that as basic management processes are increasingly automated, corporate
treasurers and CFOs have become more focused on the financial risks facing
their firms.

The report says that liquidity risk has traditionally been
the core concern for treasury units, but highlights that the survey results
indicate that, while this is still a priority, FX risk is now their biggest
concern.

Nearly 60% of respondents cited risks stemming from FX
markets among the top three financial risks, compared to 54% that stated
liquidity among the main challenges. Fifty-two per cent picked financing risk
among the top threats.

The reason for this concern is illustrated by the fact that
40% of corporates included in the survey said that their FX exposure had
negatively impacted their 2015 income statement. The number was highest in
South and Southeast Asia where half of respondents noted negative FX impacts on
their income in the reporting currency.

“Treasurers’ preoccupation with currency movements is not
surprising. Corporate profitability hit by FX headwinds is a recurring theme. A
negative translation impact into a company’s reporting currency could
potentially cloud investors’ perception even as a company generates strong
revenue,” it says in the report.

The survey also revealed that only one in 10 corporates
hedge 81% or more of their FX exposure despite increasing market volatility,
while 39% of corporates hedge 40% or less of their exposure and 13% do not
hedge any of it at all.

Although there has been a lot of research conducted
regarding whether corporates should hedge their exposure, interestingly the
report highlights that the respondents to the survey did not cite this research
as a reason why they don’t hedge their exposures. Instead, it notes that their
reasons for not hedging are actually much more pragmatic. 

“Of corporates that chose not to hedge their exposure
(through external markets and/or internal means), 42% note their companies
simply do not have any corporate policy in place that gives guidance on what or
how much of their exposure to hedge. 

“As a result, treasury functions avoid it altogether.
Twenty-seven per cent of them believe their exposure is too small to warrant
any hedging, while 8% of them say hedging instruments are just too costly,”
says the report. 

Unsurprisingly, amongst the survey respondents that do hedge
their FX exposures, plain vanilla forwards and swaps are the most common
instruments that they utilise, with over 70% stating that they use these OTC
products.

In contrast to this, only a third of respondents said that
they use natural hedging strategies, such as aligning payments with receivables
in tenor and currency and only one in four buys or sells currency option
contracts.

 

galen@profit-loss.com 

@Galen_Stops

@Profit_and_Loss 

Galen Stops

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