New Currents in Currency

It's relatively simple to hedge foreign-currency risk — if you can figure out your exposure.

In the second quarter of this year, Weatherford International Ltd.,
a $4.3 billion provider of oil and gas
drilling equipment and services, sustained
nearly $9.9 million in foreign-currency
losses. In the very next quarter, its foreign-currency losses shrank by almost 90
percent, to just $1.5 million. That’s good
news for a company that is keen to, as
senior vice president of finance and CFO
Andrew Becnel says, “remove the noise of
foreign-exchange fluctuations from the
income statement.”

For many companies, that noise can be
grating in the extreme. Four Seasons
Hotels and Resorts would have seen its net
income rise 24 percent over the previous
fiscal year if it weren’t for currency fluctuations;
instead, it posted a 42 percent decline. Given
that the S&P 500 derived more than 40 percent of its
income from overseas sales in 2005, plenty of companies
face similar risks.

Exposure Time

While currency options and currency forwards are
useful tools for hedging (see “Opting for Options” at the end of this article), the true challenge lies not so much in deciding how to hedge as in deciding how much. Determining
exposure can be a time-consuming and frustrating
exercise because companies often funnel data
from various departments, such as treasury, tax, forecasting,
and the controller’s office to a foreign-exchange
(FX) specialist, who then tries to aggregate
those pieces into an accurate whole. “To make sure
you’re hedging the right number,” says Beau Damon,
managing director of capital markets for Microsoft
Corp., “you have to get input from the accounting
group, the business units, and the folks who are forecasting
and planning revenues.” Because most companies
rely on manual processes, that level of collaboration
is difficult to achieve.

Manual processes also diminish visibility:
if one subsidiary has revenue in
pounds sterling, for example, and another
has expenses in the same currency, those
two positions can effectively create a natural
hedge. But often companies fail to
spot such situations and end up hedging
the wrong amount.

Better technology may help. For the
past year and a half, for example, Weatherford
has been working with a large
multinational bank to develop a software
module designed to help Weatherford
manage its FX exposure. The software,
which has been up and running in test
mode for several months and is scheduled
to go live in early 2007, taps into the company’s
various enterprise systems, pulls
out the data that Weatherford has found
most critical to calculating its foreign-currency
exposure (such as balance-sheet
entries for cash and cash equivalents, and
accounts receivable/payable in more than
100 countries), and presents that data in
an easily digestible format on a nearly
real-time basis. From there, Weatherford
can figure out the best ways to hedge its
foreign-currency exposure. “The key to it
all,” says Becnel, “is measurement, measurement,


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