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To Hedge or Not to Hedge
- 1. 1 To Hedge or Not to HedgeTo Hedge or Not to Hedge Riding the AUD RollercoasterRiding the AUD Rollercoaster Paul Travers Executive Director - Oakvale Capital Limited 26 March 2009 Currency Hedging in Turbulent TimesCurrency Hedging in Turbulent Times March 2010March 2010
- 2. 2 Discussion PointsDiscussion Points Currency risk management in Australia Currency turbulence and risk management To hedge or not to hedge Outsourcing
- 3. 3 AUD – The rollercoaster
- 4. 4 Currency HedgingCurrency Hedging No hedging – volatile results – See Caltex Hedging – long term currency hedging – Miners with market values in hedges outstripping equity value Hedging at the peaks –hedges being done when the pain has become to much – then the market retraces Unwinding on lows – large negative mark to markets – Terminate the hedge – currency retraces – underlying value is lost – hedge becomes a loss Looks like a losing ‘bet’ either way!
- 5. 5 To Hedge or not to Hedge? Not a view on the currency trend but an understanding of the business The Critical Question: How does currency risk manifest itself?
- 6. 6 Key Issue: Understand the impact of currency risk on the organisation. Type and Source ofType and Source of Currency RiskCurrency Risk Key Consideration: Segment Your Currency Risk Contracted Transactions Risk Forecasted Transactions Risk One-off Currency Risk Translation Currency Risk Economic Currency Risk
- 7. 7 Contract to sell/purchase goods/services in foreign country (in either a foreign currency or in $A) Type and Source of CurrencyType and Source of Currency RiskRisk Contracted Transaction RiskContracted Transaction Risk Ability to pass on risk i.e. currency adjustment clause No Currency Risk Limited Currency Risk Currency Risk Limited ability to pass on risk No ability to pass on risk
- 8. 8 Forecasted Transactions Risk Ability to pass on risk i.e. currency adjustment clause Limited ability to pass on risk No ability to pass on risk No Currency Risk Limited Currency Risk Currency Risk Type and Source of CurrencyType and Source of Currency RiskRisk Contracted Transaction RiskContracted Transaction Risk
- 9. 9 One Off Currency Risk Ability to pass on risk i.e. currency adjustment clause Limited ability to pass on risk No ability to pass on risk No Currency Risk Limited Currency Risk Currency Risk Given the likely size of material one off exposures - obtain advice before attempting risk management Type and Source of CurrencyType and Source of Currency RiskRisk Contracted Transaction RiskContracted Transaction Risk
- 10. 10 Currency Balance Sheet Items Currency Risk Currency Risk Investment / Liability with set life Long term investment / Liability Type and Source of CurrencyType and Source of Currency RiskRisk Contracted Transaction RiskContracted Transaction Risk
- 11. 11 There is no right or wrong risk management technique in relation to economic currency risk The right approach needs to address: Cost/benefit analysis of hedge; Board’s attitude towards risk; Organisation’s risk management framework and ability; and Investors’ view of the organisation. Type and Source of CurrencyType and Source of Currency RiskRisk Contracted Transaction RiskContracted Transaction Risk
- 12. 12 Should IAS 39 stop youShould IAS 39 stop you managing currency risk?managing currency risk? Overall Risk Management Approach Should not impact the overall approach Need to be careful of the details The decision to change will be linked to the outcomes sought. The major dilemma is dealing with ineffectiveness. ‘Ineffectiveness in a hedge does not mean the hedge is not effective’
- 13. 13 Key Considerations forKey Considerations for ChangingChanging What is the underlying exposure. KISS principle. Seek the most appropriate match.
- 14. 14 Options and IAS39Options and IAS39 Options are an effective tool for managing FX risk even under hedge accounting. They will create P&L fluctuations but this can be managed. Tools are available to readily manage the valuation challenges.
- 15. 15 Options and IAS39Options and IAS39 Intrinsic and Time Value Nature of the underlying exposure Movement in Time Value reversion to zero Natural amortisation of premium
- 16. 16 IAS39 and RiskIAS39 and Risk ManagementManagement Risk management principles and tools have not changed. Hence overall risk management practices should not. However, recognition needs to be given to the fact that the manner in which their outcomes are reported has changed.
- 17. 17 Treasury OutsourcingTreasury Outsourcing Strategy: Banks Independent Risk Advisors One off or ongoing Transactional Management Treasury operational service Online treasury system
- 18. 18 Treasury OutsourcingTreasury Outsourcing Key considerations Do not outsource setting the policy/strategy Keep the risk management decisions close to the business Regularly review the approach, ensure the service provider is managing the risk in line with the business Outsource the process not the risk
- 19. 19 Treasury OutsourcingTreasury Outsourcing Key Benefits Expertise Cost effective Key man risk
- 20. 20 QuestionsQuestions andand DebateDebate Paul Travers Executive Director Oakvale Capital (02) 8823 6200 pault@oakvale.com
Editor's Notes
- As we have discussed, differences under IAS 39, they should not be, as the three principles shown about and discussed by other speakers, should not change, IAS39 is not about changing risk management practices, it is about changing the way that financial statements are presented to better reflect how risks are being managed. This is being achieved, sometimes too effectively for some risk managers liking. The difficulty that most are running into are not related to showing what risk management approaches are being adopted and the broad results being presented, but more how documentation is being written and presented and how calculations are being done. Sometimes the focus on the detail is trouble of diluting the benefit the standard can provide. The current challenges comes from having ineffective accounting results. The word ineffectiveness casts shivers down accounts and risk managers spines, it cast doubt in the minds of senior executives in regard to their risk management activities, as they another financial derivative disaster about to happen. However, ineffectiveness is not necessarily a bad thing. There are three types of ineffectiveness, which are highlighted in this report: Discuss dollar, excluded component and period Discuss the grouping of exposures – how this can be managed.