Case Study - Manufacturing
A mid-sized manufacturing company operating in global markets, this business sources raw materials internationally and exports finished products to multiple regions. With fluctuating exchange rates affecting their cost structure and profit margins, the company faced significant financial risk due to FX volatility.
Challenges
The company’s exposure to foreign exchange risk was twofold:
Raw Material Purchases: The company sourced many of its materials in USD while selling in local currencies. The depreciation of the domestic currency led to higher input costs.
Export Revenues: Sales were made in multiple currencies, leading to uncertain revenue when converted to the company’s functional currency. Sudden FX movements negatively impacted margins and forecasting accuracy.
Despite efforts to manage this internally, the company found that its current approach lacked efficiency, leading to unpredictable cash flows and pressure on profit margins.
Our support
The company engaged our team to design a structured FX hedging strategy that aligned with its business model and financial objectives.
Our approach included:
Risk Assessment & Policy Development: We conducted a comprehensive review of the company’s FX exposures, analyzing historical volatility, cash flow patterns, and budget sensitivity.
Hedging Strategy Implementation: A tailored hedging program using forward contracts was introduced to stabilize cash flows. The strategy accounted for both purchase and sales exposures, reducing FX-related uncertainty.
Hedge Effectiveness Testing & Reporting: Our team implemented robust hedge accounting practices to ensure compliance with financial reporting requirements and enhance transparency in financial statements.
Ongoing Risk Monitoring: A continuous review process was established to adjust the hedging strategy based on market conditions, ensuring ongoing effectiveness.
Outcome
With a structured FX hedging strategy in place, the company achieved:
Stabilized Cost Structure – Predictable raw material costs reduced margin erosion.
Improved Financial Forecasting – The company could confidently plan for revenue and expenses.
Enhanced Profitability – Reduced FX-driven fluctuations led to more stable earnings.
Stronger Financial Governance – Compliance with hedge accounting standards improved financial reporting integrity.
By partnering with Hedge Effective Advisory, the manufacturing company successfully navigated FX volatility, strengthening its financial resilience and strategic decision-making. With a proactive risk management approach, the business now operates with greater confidence in global markets.