Key Takeaways from the Members of FXMPG
Trade War Politics, to Hedge or Not, the Forwards vs Options Conundrum, and FASB’s Commodity Hedge Accounting Shortfalls
Thank you to the members and guests who attended the Foreign Exchange Managers’ Peer Group meeting this month hosted by Medtronic in Minneapolis and sponsored by Standard Chartered. Here’s a brief rundown of some of the meeting’s key takeaways.
China Trade War: Just Politics? The Trump Administration’s trade war rhetoric appears to be heating up, but Standard Chartered assured attendees that much of it is politics. The bank’s expert on China’s renminbi (RMB) said that optimism for a near term solution is low, given China wants to become a technology powerhouse while US hawks balk at that prospect and decry the US’s China trade deficit.
• Takeaway: Common sense should prevail. After midterm elections the cost of imposing tariffs will become clearer and the political calculation should change. In addition, corporate America is lobbying against tariffs behind closed doors.
• Takeaway: Too much to lose. China has signaled its intent to stabilize the RMB and make it an international currency, in part by increasing liquidity in more sophisticated financial instruments. China has no interest seeing the RMB weaken further in the near-term.
To Hedge or Not to Hedge. A Standard Chartered banker explained how analyzing hedging needs on a portfolio basis can provide a bigger bang for the buck.
• Takeaway: More risk reduction for less. Considering all exposures holistically gives a more realistic understanding of risk. By calculating value-at-risk (VaR) this way, overall risk is 40% lower than calculating it for each currency (and a lighter load for treasury). Adding a small number of additional currencies can reduce risk by an additional 40% without increasing cost.
Forwards vs Options: The Ongoing Conundrum. In a roundtable discussion, members presented a strong argument for focusing on forwards, given options’ premium cost and the operational challenges. Others, however, noted that technology can reduce the operational hurdles, and zero-cost collars eliminate premiums.
• Takeaway: Options, with a view. Participants concluded that on the relatively rare occasions they’ve used options rather than forwards, it was with a view to the currency moving in a certain direction.
•Takeaway: Mixing options lowers vol. A Standard Chartered banker said recent research found that layering forwards and options further reduces volatility than using just forwards.