Keeping exchange rate risks at bay
Foreign business and foreign currencies are inherently intertwined. As businesses expand globally, they become susceptible to various risks. When engaging in international trade and foreign currency transactions, corporates must carefully evaluate and mitigate these risks. RBI experts Martina Zimmerl and Martin Steiner explain how these risks can be hedged effectively.
The CEE region is an attractive market, but it is not homogeneous, especially when it comes to currencies. ‘As most countries have their own currencies, companies have to deal with possible exchange rate risks,’ Martina Zimmerl, Head of Group Capital Markets Sales, points out. ‘Foreign currency risks often have greater effects than expected, as losses from exchange rates can have a major impact on the core business and affect pricing policy and competitive position.’ This is where hedging comes into the equation as an important financial strategy for risk management.
The most important goal here is to reduce cash flow fluctuations. ‘A stable cash flow enables effective planning for new investment opportunities and enhances the realibility of internal funding . If you look at the higher costs of external financing compared to internal funds, the latter are a more attractive source of financing,’ says the finance expert. ‘If smaller companies have not yet reached critical mass, they have to expect a large credit spread for external funds. Hedging can reduce this imbalance.’
Working together to find the best solution
‘One thing is for sure: there is no universal hedging strategy that fits every company, every market and every risk,’ explains Martin Steiner, RBI Corporate Sales Expert. ‘Hedging is very individual and depends on many factors. A competent sparring partner with the necessary expertise can be a real game changer for corporates,’ he is convinced. ‘An external professional can help to find the ideal capital structure, the ideal cash position and the ideal ratio of fixed to current assets. Analyzing peer groups also opens up new perspectives. In addition, the application of hedge accounting for hedging instruments can limit the PnL volatility. With an empirical analysis of the performance of hedge instruments, experts can shed light on the attractiveness of individual strategies in different market environments and help companies make more informed decisions.’
‘Even for companies with specialized risk departments, the exchange with external partners can be beneficial,’ the specialist adds. ‘Weighing up arguments and analyzing new points of view is key to successful risk management, especially in a constantly changing market environment. Ideally, hedging strategies which are based on assumptions that no longer apply should be reconsidered.’
Local expertise as the key to success
‘Especially in the CEE region, communication regarding regulations is often less transparent than in other countries,’ says Martina Zimmerl. Local banks have therefore proven to be the right partners for complex and volatile markets. ‘They know the local regulations, customs and traditions inside out and help companies to find their way around.’ Another advantage: both potential legal risks and the costs of cross-border transactions can be reduced by having a local business partner: ‘With our local subsidiaries in CEE, we use our network and our presence to help customers with more effective and efficient hedging solutions.”
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