Export companies are by definition focused on international markets. Despite the promise of increased revenues, exports inherently increase the exposure to currency and other financial markets.
Recent events have clearly illustrated the huge impact of currency on price and, by extension, on the market. Regardless of the performance of the Swiss franc, one thing is certain — the past few months have been the most volatile in the history of the euro. So how do export-oriented Swiss companies deal with these risks? This question is at the heart of an empirical study carried out by Zanders in collaboration with the Institute for Finance at the University of Applied Sciences, Northwestern Switzerland.
Around export-oriented Swiss companies took part, which makes it a representative survey on foreign exchange management. Companies are aware of the risks — but do they take evasive action? On closer inspection, however, it becomes clear that many of these companies confine themselves to simply translating their foreign currency balances. Even simple scenario analyses are only conducted by a handful of companies.
Sophisticated approaches including statistical procedures and stress tests are the exception. However, the survey also revealed that around half a dozen participants take neither a qualitative nor a quantitative view of the risks. What tools do they use? Unsurprisingly, the use of Excel is prevalent.
The study addressed another interesting issue: This is legally permitted and, in the past, was often promoted as a simple measure that is quick to implement. In reality, however, almost all the companies surveyed keep their accounts in Swiss francs and a handful in two currencies. The results so far show that, while the companies recognize their risks, they do not adequately quantify them. In light of this, what exactly does their foreign exchange management involve? In principle, the management of risks means avoiding, overcoming or bearing those risks with the appropriate safeguards in place.
Companies tend to focus most on eff orts to avoid or overcome foreign exchange risks. It is interesting to note that more than a third of the companies have the necessary pricing power to respond to the strength of the Swiss franc by revising their prices upwards. This suggests that many have found their niche or off er unbeatable quality which sets them well apart from their competitors.
Sixty per cent of the companies do not engage in any form of hedging, despite having rated the importance of foreign exchange management at their company as average or high. The most popular instruments used for hedging are comparatively simple ones, such as forwards, foreign exchange swaps and spots.
More exotic or complex options are used rarely by the companies that took part in the survey. Given that relatively few companies hedge the risks, and the great volatility of exchange rates at present, the moot point is whether the companies see a need for investment in foreign exchange management.
Two-thirds of the respondents do not invest in this area. All the same, almost a fi fth of the companies surveyed want to expand or improve their reporting on the currency risk and develop hedging strategies. Around a dozen want to introduce a treasury management system or expand functionalities.
Another measure cited by the companies is the practice of continually reducing their balances in foreign currency.
They seek to achieve this by expanding their customer base in Switzerland or making greater use of natural hedging. There is a need for action among Swiss export companies with regard to managing currency risks. If a company is not aware of its own foreign currency risks, it cannot manage them. The key point is for companies to make both qualitative measurements and, primarily, quantitative measurements.
It is not enough to sense the risks, they must actually be measured too. It is relatively easy to identify and measure the risks with the help of an integrated financial planning system. Furthermore, the question of choosing the right instruments to hedge the identifi ed risks can be reduced to the common denominators of applicability, experience and simplicity.
In reality, however, it is only recently that many export companies have had to deal with financial instruments. Therefore, the relevant experience will only be available in exceptional cases. This puts the need for simple instruments into perspective. On the other hand, following this intervention, the question was raised of whether those who had hedged the risks had been made to look foolish. However, if the strength of the Swiss franc were to continue and the SNB did not intervene, the strategies employed by the majority of Swiss export companies — price increases, natural hedging — would be pushed to their limits.
Thank you for your contact request. We will get in touch with you soon.More...