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The Impact of Currency Volatility Can Reach Billions – But You Can Manage the Risk

The Impact of Currency Volatility Can Reach Billions

In a recently-released whitepaper based on in-depth analysis of corporate earnings calls, the value of the euro, and key events in the eurozone, FiREapps explains how currency volatility can impact your bottom line, why that impact is going to intensify, and what you can do to manage currency risk. Savvy organizations are doing just that; they are assessing their exposure to currency risk, deciding how much risk is acceptable, and taking steps to manage that risk.

That’s not business as usual for many companies. Yet currency risk management has become a priority of 88 percent of U.S.-based multinational corporations. That’s a good thing, because when currency risk isn’t managed, the quantitative impact of volatility can be huge – billions of dollars in total, based on second quarter reports. For a handful of companies, currency-related losses were well over $500 million.

So it is for good reason that stock analysts have begun to ask tough questions about companies’ exposure to currency risk and the steps they are taking to manage that risk. CEOs and CFOs can no longer get away with skirting the question. In our analysis of corporate earnings calls across three quarters (2011Q4-2012Q2), we found that the number and intensity of FX impact-related questions from investors and analysts followed the same path as the volatility of the euro: as euro volatility increased, analysts became more dogged in their questions about companies’ strategies to manage currency risk.

Smart management will become ever more critical as currency volatility around the world intensifies. We can’t know for certain what will happen in the eurozone. It may be a breakup of the euro precipitated by Germany or Greece, or a Greek exit, or additional bailouts. We do know that just as past bailouts, debt refinancing, elections, and downgrades have precipitated rising euro volatility, so will a number of upcoming events (including major elections in Europe). These are events that corporate risk managers should be monitoring as they manage currency risk during these turbulent times.

But it’s not just the euro causing currency volatility. The eurozone crisis has led to currency volatility in traditional “safe haven” currencies like the U.S. dollar, the Swiss franc, and the Japanese yen, as well, precipitating aggressive currency management and a competitive devaluation currency war.

As currency volatility in Europe and around the world continues to intensify, the challenges that CFOs, treasurers, and risk managers are confronted with continue to grow as well. Only those organizations with robust foreign exchange exposure management strategies will minimize the impact to earnings as volatility intensifies. Developing such strategies is possible (many organizations have already done it); it’s not too late, but the time is now.

Key Takeaways

  • Currency volatility can have a significant impact on the multinational corporation’s bottom line
  • Volatility in currencies around the world is set to intensify
  • It is not yet too late to put in place systems for assessing and managing currency risk

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