Corporate Foreign Exchange Risk Management

Chapter 9Managing FX Risk Exposures

Many guidelines for risk management processes start with the recommendation to decide on the objective first. What is it that we want to achieve? Are we going to manage cash flow, net income, or something else? Unless the objective is stated in terms of managing a specific performance measure, the thinking seems to be that the process lacks purpose and direction.

We see it a bit differently. Corporate performance is too multifaceted for that approach to work. More than one thing can be of high priority to the firm, and what is felt to be most important can change over time as circumstances change.

Our recommendation is instead to first of all get the basics right. A cost‐efficient and well‐functioning FXRM programme rests on certain pillars. When those are robustly in place, we can start thinking about how to actually manage FX exposures. A key aspect here is knowledge about exposures. FXRM, in our view, largely comes down to being good at monitoring FX exposures at multiple levels of performance. This should be the primary objective of the FXRM process.

At the end of the day, FXRM should be part of a broader framework for managing the firm's risk and return in a holistic manner. As discussed in the previous chapter, FXRM as a silo activity is getting increasingly difficult to defend. In a nutshell, exposures should be managed so as to keep the risk of breaching critical performance thresholds at acceptable levels, whilst maintaining an ...