Case Study: How a Manufacturing Business Overcame FX Volatility
One of the common challenges countless companies face is hedging against currency risks, especially when taking businesses global. Although there’s no one-size-fits-all approach to reducing FX risks, implementing a hedge accounting program can prove invaluable.
This article covers the client case study of a market-leading manufacturing business listed on the ASX. The business was experiencing strong sales growth in the UK market and wanted to lock in projected GBP forecasts into known AUD equivalents.
The Challenge
Since the company is listed on the ASX, it must provide revenue forecasts to the market, outlining expectations for the next 6 to 12 months. However, the company started to grow its UK market share, with offshore revenue in other currencies increasing. Should the AUD strengthen, the company’s exposure to offshore revenue could result in missing potential targets, causing investor uncertainty and a volatile share price.
How could the executive team be confident of hitting the targets if exposed to foreign exchange risk?
Through careful research and analysis, the CFO determined that implementing foreign currency hedging would be the best avenue to lower risks. This brought about two new challenges:
1. the company needed board approval for the hedging policy
2. the finance team had no experience developing or implementing the hedge accounting program needed to remove the associated accounting volatility caused by the hedging policy.
Our Solution
Our specialist hedge accounting team suggested four solutions to overcome the hurdles of implementing a robust and compliant hedge accounting program. First, we created a Derivative & Hedge Accounting Policy (DHAP) for the Audit & Risk Committee to approve. After approval was granted, the company enlisted our team to run the hedge accounting program on behalf of the finance team, infusing independence and oversight.
Even with our hedge accounting specialists working in the background to maintain compliance, our Hedgehog Software was added to the finance team’s suite of solutions. This eliminated operational silos and streamlined the hedge accounting reporting. Finally, Hedge Effective Advisory was contracted to provide ongoing advice and support to the company during subsequent audits.
The Results
The customised solutions we provided to the company led to astounding results. For one, the hedge accounting program successfully reduced the accounting volatility caused by new foreign exchange risk management policies. Next, the finance team grew confident that their hedging activities would not distort financial results.
Most notably, the finance team was able to focus on the core finance objectives instead of getting bogged down in the details of hedge accounting. The company can pursue revenue streams in other countries without restriction or concern for foreign volatility, creating new growth and profit opportunities.
Are you in a similar situation?
If this case study sounds familiar, contact one of our team members at Hedge Effective Advisory today. Like this company, we can identify your organisation's main challenges and suggest viable and personalised solutions.
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