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To Hedge or Not to Hedge - by Paul Travers, Executive Director, Oakvale Capital
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To Hedge or Not to HedgeTo Hedge or Not to Hedge
Riding the AUD RollercoasterRiding the AUD Rollercoaster
Paul TraversExecutive Director - Oakvale Capital Limited
26 March 2009
Currency Hedging in Turbulent TimesCurrency Hedging in Turbulent Times March 2010March 2010
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Discussion PointsDiscussion Points
Currency risk management in Australia
Currency turbulence and risk management
To hedge or not to hedge
Outsourcing
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AUD – The rollercoaster
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Currency HedgingCurrency Hedging No hedging – volatile results – See Caltex
Hedging – long term currency hedging – Miners with market values in hedges outstripping equity value
Hedging at the peaks –hedges being done when the pain has become to much – then the market retraces
Unwinding on lows – large negative mark to markets – Terminate the hedge – currency retraces – underlying value is lost – hedge becomes a loss
Looks like a losing ‘bet’ either way!
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To Hedge or not to Hedge?
Not a view on the currency trend but an understanding of the business
The Critical Question:
How does currency risk manifest itself?
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Key Issue: Understand the impact of currency risk on the organisation.
Type and Source of Type and Source of Currency RiskCurrency Risk
Key Consideration: Segment Your Currency Risk Contracted Transactions Risk Forecasted Transactions Risk One-off Currency Risk Translation Currency Risk Economic Currency Risk
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Contract to sell/purchase goods/services in foreign country(in either a foreign currency or in $A)
Type and Source of Currency Type and Source of Currency RiskRisk
Contracted Transaction RiskContracted Transaction Risk
Ability to pass on riski.e. currency adjustment clause
No Currency Risk Limited Currency Risk Currency Risk
Limited ability to pass on risk
No ability to pass on risk
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Forecasted Transactions Risk
Ability to pass on riski.e. currency adjustment clause
Limited ability to pass on risk
No ability to pass on risk
No Currency Risk Limited Currency Risk Currency Risk
Type and Source of Currency Type and Source of Currency RiskRisk
Contracted Transaction RiskContracted Transaction Risk
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One Off Currency Risk
Ability to pass on riski.e. currency adjustment clause
Limited ability to pass on risk
No ability to pass on risk
No Currency Risk Limited Currency Risk Currency Risk
Given the likely size of material one off exposures - obtain advice before attempting risk management
Type and Source of Currency Type and Source of Currency RiskRisk
Contracted Transaction RiskContracted Transaction Risk
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Currency Balance Sheet Items
Currency Risk Currency Risk
Investment / Liability with set life
Long term investment / Liability
Type and Source of Currency Type and Source of Currency RiskRisk
Contracted Transaction RiskContracted Transaction Risk
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There is no right or wrong risk management technique in relation to economic currency risk
The right approach needs to address: Cost/benefit analysis of hedge; Board’s attitude towards risk; Organisation’s risk management framework and
ability; and Investors’ view of the organisation.
Type and Source of Currency Type and Source of Currency RiskRisk
Contracted Transaction RiskContracted Transaction Risk
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Should IAS 39 stop you Should IAS 39 stop you managing currency risk?managing currency risk?
Overall Risk Management Approach
Should not impact the overall approach
Need to be careful of the details
The decision to change will be linked to the outcomes sought.
The major dilemma is dealing with ineffectiveness.
‘Ineffectiveness in a hedge does not mean the hedge is not effective’
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Key Considerations for Key Considerations for ChangingChanging
What is the underlying exposure.
KISS principle.
Seek the most appropriate match.
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Options and IAS39Options and IAS39
Options are an effective tool for managing FX risk even under hedge accounting.
They will create P&L fluctuations but this can be managed.
Tools are available to readily manage the valuation challenges.
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Options and IAS39Options and IAS39
Intrinsic and Time Value Nature of the underlying
exposure Movement in Time Value
reversion to zero Natural amortisation of premium
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IAS39 and Risk IAS39 and Risk ManagementManagement
Risk management principles and tools have not changed.
Hence overall risk management practices should not.
However, recognition needs to be given to the fact that the manner in which their outcomes are reported has changed.
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Treasury OutsourcingTreasury Outsourcing Strategy:
Banks Independent Risk Advisors One off or ongoing
Transactional Management Treasury operational service Online treasury system
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Treasury OutsourcingTreasury Outsourcing
Key considerations Do not outsource setting the
policy/strategy Keep the risk management decisions
close to the business Regularly review the approach, ensure
the service provider is managing the risk in line with the business
Outsource the process not the risk
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Treasury OutsourcingTreasury Outsourcing
Key Benefits
Expertise
Cost effective
Key man risk
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QuestionsQuestionsandand
DebateDebate
Paul TraversExecutive Director
Oakvale Capital(02) 8823 6200
