AFP Risk Newsletter
by Wolfgang Koester
How ironic is it that in November, when the business press was on the verge of declaring the U.S. dollar’s demise, the greenback suddenly halted its skid and began to resurge? From November 25 through mid-December, the U.S. dollar index rose 3.09 percent. That’s a substantial move over a short time period. More importantly, it represents a break in a long-term downward dollar trend over the last six months that looked to have no end in sight.
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by Karen Kroll
Judging from the earnings statements coming out of corporate America during the last half of the year, more than a few companies were hit by unfavorable foreign currency fluctuations. Amazon.com, Inc.; Lennox International, Inc.; and Pfizer, Inc., among many others, all reported a negative impact to earnings from foreign exchange rates. "Companies that thought their foreign exchange exposures weren't material got hit with large losses," says John Herrick, principal with Treasury Strategies, Inc., New York City.
More companies also are working in smaller and emerging markets. "Volatility is largest in the non--G-10 currencies," notes Wolfgang Koester, chief executive officer with FiREApps, a Scottsdale, Ariz.-based provider of solutions to manage foreign exchange risk. The three most volatile currencies against the U.S. dollar over the past year were the Hungarian forint, the Polish zloty, and the South African rand, again according to RatesFX.com.
On a Knife Edge
FX risk could be the decider in Q3 corporate earnings
by Wolfgang Koester
In Q2 of this year, corporate earnings and expectations demonstrated a striking realignment. Coming out of a sharp plunge into recession, with cost-cutting efforts paying off,demand stabilizing and expectations lowered, more than 70% of U.S. companies gathered enough steam to exceed expected Q2 earnings. According to Bespoke Investment, that number marks a 10-year high in “beat rates” and establishes a track record of two consecutive, quarter-over-quarter increases. Today, with Q3 earnings results coming in, it looks like U.S.companies may be poised to pull off a hat trick.That’s the good news. The real question that corporate executives are now asking themselves, however, is how they’ll be able to meet expectations for Q4 and beyond. As the bar continues to be raised for their performance,and while consumer spending, corporate liquidity and global economic growth continue to flag, companies who want to continue to beat the Street are going to have to manage costs and risks like never before. Not surprisingly, I look at this challenge through the lens of foreign exchange risk. With such a tight margin of error in Q3 and beyond, it’s easy to see how the EPS impact of foreign exchange volatility often meant the difference between meeting or missing earnings forecasts for multinational companies.
By Richard Gamble
Volatile currency markets and a blindness to some exposures were taking some nasty swipes at the income of $1.3 billion ADC, a Minneapolis telecommunications equipment company, in late 2008.
“We believed that we were doing the best that we could with our existing tools and resources,” reports Jason Cohen, vice president and treasurer, “but as the market became more volatile we knew there were exposures on our books that we weren’t finding or hedging. We have 3,000 [general ledger] accounts, and the only way we could have found those exposures with our old system would have been to go through all those accounts one by one. We didn’t know exactly what we were missing as the environment turned more uncertain, but we knew we were not satisfied with the results.” About 40% of ADC’s business is international and it has exposure to approximately 60 different currency pairs.
To view this article online at Treasury and Risk, click here.
