In this fast-moving and globalised economy, large corporates have learned how to adapt and maximise profits while small and medium-sized enterprises (SMEs) and mid-caps are usually not so well prepared. Trading globally is becoming something usual, but the associated financial risks are often not well understood or managed. In this post-financial crisis scenario, banks are being forced to deleverage, and companies are experiencing increasing difficulties in getting access to credit and financial derivatives with which to hedge risks. SMEs and mid-caps are, as usual, much more affected than large corporates. But while several surveys have addressed foreign exchange (FX) hedging among large corporates, data on SMEs and mid-caps is much rarer.
A recent study by Kantox and ACCA, Hedging FX Risk , has revealed the challenges faced by SMEs and mid-caps with an exposure to FX risk. This study was based on a survey of 119 SMEs and mid-caps from more than 15 countries; the typical respondent had revenues of just over US$200m and traded about 19% of revenue a year in foreign currencies.
‘Insufficiently hedged’
- The first finding is that SMEs and mid-caps are significantly exposed but insufficiently hedged. The majority (83%) experienced FX losses or gains in 2012 due to exchange rate volatility, and for one-third (33%) the amount of FX loss or gain has exceeded US$1m, resulting in a direct impact on profit margins.
- Despite these substantial exposures, 14% of businesses still did not hedge FX risk. Those that did so usually preferred simple methods such as forward contracts and natural hedging. SMEs and mid-caps need simple, transparent and low-fee solutions to hedge FX risk. Businesses are frustrated by the cost and complexity of hedging products. Respondents who chose not to hedge FX risk usually cited high costs and opacity regarding rates.
-
Despite good intentions, SMEs and mid-caps do not actively manage FX risk. Even if the majority (77%) of businesses claimed to have a formal written FX risk-
management policy, only just over half (51%) monitored their FX exposure at least weekly. - In times of high volatility, such as most of 2012, the 49% of respondents that were not monitoring their positions at least weekly were running a high risk of FX loss. Perhaps worse, 30% did not analyse their exposure in order to understand their potential FX loss in the event of adverse market movements.