Painful Conversions

As currency risk intensifies, companies of all sizes are taking steps to protect cash flows.

Just two years ago, EXL, a business process outsourcing company, didn’t have a treasury department. The finance staff and senior management watched currency fluctuations carefully, but they lacked an explicit policy to address the risk to their cash flows.

That risk hit with a vengeance in 2008, when the $180 million company confronted a $9 million foreign-exchange loss, largely as a result of losses on forward contracts and the revaluation of assets and liabilities due to the rapidly depreciating rupee in India, where many of the company’s employees are based. “The currency moved very rapidly and very suddenly,” says Rohit Kapoor, EXL’s chief executive officer and former finance chief.

Such moves concern many companies these days; even small businesses now routinely operate in global markets, and the relationship between the dollar and many major currencies has reached new levels of volatility.

EXL decided to invest in what Kapoor terms “a structured program to eliminate the risk.” Today the company has a treasury staff of four and a carefully designed protocol for guarding against currency risk in its contracts, which can run as long as five years. “Currency risk is one of the most important issues that we deal with,” says Kapoor. “Unfortunately, we learned that the hard way.”

Other companies may soon share his view. In the past two years, one of the most watched international rates — the euro versus the U.S. dollar — has swung wildly, from as high as $1.60 to the euro to as low as $1.25 (see the chart below). As recently as 2002, the euro was worth 85 cents. “It is stunning how what you think is going to happen changes 180 degrees in a few months,” says Larry Harding, president of High Street Partners, an international business-services firm that advises companies on their overseas expansion plans. “Two or three months ago, the big worry was the declining dollar. Now, that has completely turned around.”

The growing sense that the dollar was losing its place as the world’s reserve currency, and speculation that it could be replaced by the euro or a basket of other currencies, have all but disappeared as the euro has tumbled into crisis. With Greece’s economy teetering and other nations in the European Union possibly following it into the abyss, the euro looks nothing like the hearty competitor it was prior to the recession.

The euro-U.S. dollar exchange rate has swung wildly over the past 12 months.

And despite burgeoning deficits and an economy that could grow slowly for the next few years, the United States has, somewhat surprisingly, reclaimed its long-standing role as the world’s safest currency. “It’s really a race between the Europeans and us to see who can screw up their fiscal policy more,” says Richard Marston, a professor of finance and economics and director of the Weiss Center for International Financial Research at The Wharton School of the University of Pennsylvania.

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