Natural Performers

Companies are increasingly relying on natural hedges to juggle currency risks.

In other words, multinationals seem determined to hedge all their transaction risk but are letting more and more translation risk take care of itself. That may not be a problem as far as earnings are concerned, but when it comes to their balance sheets, they have to keep their fingers crossed.

Sidebar: Derivative Decline

The use of financial instruments to hedge risk has declined since FAS 133 took effect June 15, 2000, according to surveys conducted by the Association for Financial Professionals (AFP).

Much of the decline reflects the sharp fall in interest rates since then, since most financial hedges are intended to offset the risk of rising interest rates, and the survey found the biggest decline in the use of such instruments designed for that purpose. Fully 21 percent of the respondents to an AFP survey taken last September reported decreasing their use of derivatives for hedging interest-rate exposure since FAS 133 went into effect, compared with 7 percent that had increased their use.

But the survey also found a drop in currency-oriented derivative use, with 13 percent of the respondents reporting a decline in that type of hedging activity, against 12 percent who said they’d increased it. And as the table on page 39 shows, the use of financial instruments to hedge specific types of currency risk has declined across the board.

Some of the decline in currency hedging no doubt is a product of the advent of the euro, which has supplanted currencies in many European countries. But evidence also points to the increasing use of centralized treasury operations, which enable companies to take greater advantage of natural hedges. In addition, nearly half of the respondents to the AFP survey agreed that FAS 133 had imposed “an excessive” reporting burden on their companies.


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