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How do large companies manage FX risk?

Whether you’re the CFO of a multinational corporation or you run a small business with an international footprint, your finances will be exposed to FX risk – an unpredictable force that does not discriminate depending on the size of an organisation. Large or small, all international businesses are susceptible to exchange rates and their potential to cause revenue and costs to fluctuate with them – but this risk can be managed.

No two businesses’ international payment requirements and goals are the same – they have different commercial contexts, timescales, and risk appetites. Amid this dynamic environment, large businesses recognise there is no prescribed approach to FX risk management. To successfully navigate unstable currency markets, their treasury team crafts a tailored hedging strategy that aligns with the business and its goals by blending market insight and financial contracts – from simple spots and forwards to technical currency options.

This proactive approach to FX risk management instils financial stability amid exchange rate uncertainty – but it’s not a silver bullet. While a robust hedging strategy can induce financial gains, sometimes it can only cap losses such is the force of adverse currency market movements.

FX hedging: profits and losses

While booming international sales is the holy grail of many multinational giants, FX risk can make them victims of their own success amid an ongoing challenge: how to bring their revenue back to the country they are headquartered in without it being eroded by fluctuating exchange rates. What’s more, these market movements can drastically influence costs associated with expenses they might incur in foreign currencies like manufacturing, marketing, and international employee salaries.

Take Apple for example. The California-based technology giant – famous for creating the iPhone, iPad and Macintosh computers – has a strong track record when it comes to hedging FX risk.

With over 65% of its revenue generated outside the US, it’s acutely aware of the importance of managing exchange rates proactively – and includes the effects of FX headwinds in calculating its earnings guidance. Back in 2015, Apple recognised a whopping $3.5 billion in gains from all of its currency hedges that fiscal year. Typically in place for three months to a year or longer, they protected uncertain future cash flows amid a rising dollar.

Fast-forward to 2023, however, and dollar headwinds were so severe that Apple’s revenue was eroded in the first quarter, falling 5.5% – only the second time in the last decade it had reported a fall in Q1 revenues compared to the same period the previous year. A relentless dollar rally saw the US currency surge to multi-decade highs, reducing the income of multinationals, like Apple, that convert foreign currency into dollars – forcing them to restructure their hedge strategy.

Other Big Tech companies that were buffeted by dollar headwinds in 2022/2023 include Amazon, Microsoft, Alphabet and Meta, whose net income fell 9%, 14%, 27% and 52% respectively in the third quarter of 2022. Multinationals like Coca-Cola Co, Procter & Gamble, and Philip Morris International Inc also cited currency forces in their earnings reports during this tumultuous period.

Hedging FX risk: size doesn’t matter

Large businesses have two distinct advantages over small and medium-sized enterprises (SME) when managing FX risk exposure: they have large in-house treasury teams that dedicate their time and resources to this discipline, and their financial capacity means they are better placed to absorb any losses incurred by adverse currency market movements.

Empowered by this, large multinationals typically have dynamic hedging strategies in place that are under constant review. Conversely, many SMEs do not actively manage FX risk, erroneously believing it’s too complicated, time-consuming, and expensive – and therefore not a priority. According to research by the British Business Bank, just 4% of exporting SMEs use products to mitigate against foreign currency risks.

Despite these entrenched barriers, tailored FX hedging strategies aren’t the preserve of large multinationals – and should not be optional for SMEs. So, how do they overcome them and gain a firm footing within the currency markets? Because those responsible for treasury management in an SME typically wear several hats, they often lack the time needed to develop and execute a bespoke strategy or don’t understand the intricacies of doing so – but help is available.

If your business has overseas costs and/or revenue, a currency specialist will work in partnership with you to develop a tailored hedging strategy that minimises the associated risks, manages outgoings and increases the accuracy of forecasting – so you can focus on running your business.

At Lumon, we provide you with a platform to prioritise growth and profitability with confidence by mirroring the function of a large in-house treasury team. We will work in partnership with you to achieve transparency and stability amid a mountain of available products and approaches by crafting, implementing and reviewing a strategy that aligns with your business’s risks and goals – empowering you to manage FX risk with certainty by leveraging tailored solutions.