Painful Conversions

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

Today, EXL hedges about 60% of its currency risk through one of these two approaches. For clients that don’t like either method, EXL will agree only to a shorter-term contract, and will address any resulting foreign-exchange risk through financial hedges.

While EXL faced some reluctance from clients when it introduced these policies, Kapoor says most customers are understanding, in part because they realize that they still save money by outsourcing to EXL even after accounting for potential currency-related adjustments.

Who Should Hedge?

The aerospace and defense giant Lockheed Martin also considers its currency risk from the very beginning of every contract. But instead of attempting to directly share the risk on a specific program with its potential customers as EXL does, Lockheed develops a financial hedging strategy for the life of the program — which could be as long as 20 years — and factors in the expense of executing the necessary hedging contracts with the bank before quoting a price, says CFO Bruce Tanner.

Lockheed has honed its currency-risk-management strategy as its international business has expanded rapidly; at $2 billion, its foreign-currency hedge portfolio is more than double what it was just two years ago. With long-running fixed-price contracts, offsetting the impact of currency fluctuations — a certainty over such a time frame — is critical, says Tanner.

“The company’s treasury department leads training seminars across the company to make sure employees are equipped with the information and tools they need to identify foreign-currency exposure, assess the related risk, and properly price the risk in their proposals,” says Tanner. The company also provides training for finance and accounting staff to make sure that everyone understands the accounting and reporting requirements for hedging activities.

Such an approach, however, may be best left to large, well-staffed companies such as Lockheed. When iRobot CFO Leahy was finance chief at Keane, an IT consulting and business process outsourcing firm with approximately $1 billion in annual revenue, the firm spent significant amounts of time investigating a currency-hedging strategy, only to decide it lacked the expertise internally to even vet possible service providers properly. “With outside help, we did a lot of work to try to educate ourselves and to find better ways to protect ourselves, but for a company our size, it was pretty tricky,” he says. “Hedging needs to be approached thoughtfully and carefully with the right advisers. It is not for neophytes.”

Still, given the volatility of the past two years, even small companies are starting to explore the possibility of hedging through derivatives, according to Sanela Hodzic, director of strategy and business development at Calypso, a developer of trading and currency-management software platforms for banks and corporate treasury departments. “Over the last 18 months, we have had CFOs and treasurers of smaller corporations from all different sectors calling us and saying they’d like to put currency-hedging programs into place,” she says. “Having gone through the financial crisis without these programs, a lot of them have been caught with losses that they’d like not to face again.”

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