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Four key considerations to managing foreign exchange risk with a strengthening dollar

Considering the ongoing hawkish rhetoric from the Federal Reserve, the U.S. dollar continues to show meaningful strength since reaching a 12-month low earlier this summer. As the Fed attempts to stick a successful soft landing, multinational companies (especially those with foreign-denominated revenues) are once again facing negative FX impacts.

Now is a great time to address these four key questions on how corporates are navigating the currency markets and protecting their organizations' bottom lines.

1. How much flexibility do we have to react strategically to a strong dollar environment?

In a rising dollar environment, one of the first things senior executives seek to understand is the company’s overall exposure and FX risk profile. Even companies with robust hedging programs can feel significant impacts of sharp movements in currencies, which can be amplified by programs that leave little room for strategic decision-making. Ensuring that the company’s FX policy provides a sufficient level of flexibility to adjust its strategy quickly, including target hedge ratios, products, and duration based on changing market dynamics is a key best practice to running a world-class hedging program.

2. What is driving an FX gain or loss?

Prudent stakeholders understand which FX risk variables can be controlled through hedging and which levers to pull in various market conditions. Having a firm understanding of what’s driving a corporate’s FX gain/loss is key in the fight to manage balance sheet risk appropriately; this becomes even more critical during times of high market volatility. Best-in-class treasury teams are implementing technology solutions that help to identify key drivers of FX gain/loss in a matter of minutes, providing on-demand insights to variables such as forward point cost, hedge timing mismatches, over/under hedging, and spot slippage.

3. How effectively and efficiently are we mitigating FX risk?

Assessing hedge program performance is an important part of treasury’s role and increases in visibility as the potential for negative FX impact increases. In addition to understanding program performance, senior stakeholders will often expect near-real-time insights into currency- or entity-level hedge results, putting added pressure on teams to compile the relevant data and provide fast, accurate answers.

Having the right tools in place can turn the required data aggregation and analysis from an exercise that takes hours into one that takes minutes. Aided by industry-leading exposure aggregation, analytical tools, and dashboards, Treasury teams are increasingly turning to business intelligence technology to save precious hours and deliver real-time insights to executive leadership.

4. What other market-driven opportunities should we explore?

In markets with significant variance between USD and non-USD interest rates, companies will often look to cross-currency swaps as an alternate strategy for reducing currency exposure. By synthetically converting U.S. dollar debt to foreign-denominated debt, a company can also reduce interest expense. The strengthening dollar provides an additional opportunity to “re-coupon” existing transactions at a more favorable FX spot rate while crystalizing current asset positions. While these transactions can have significant benefits, the economic and accounting considerations are best reviewed with an independent advisor and fiduciary who can provide the expertise required for you to make the best decision for your company.

The bottom line

When considering the current strong dollar environment and existing volatility in FX markets, it is important to revisit your company's risk management strategy. Chatham's advisory team can partner with you to design and execute a best-in-class hedging strategy based on your economic and accounting objectives.

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Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit