Hedging foreign currency cash flows can yield significant benefits. Because a firm’s valuation is the present value of all of its future cash flows, reducing earnings volatility improves a company's valuation and access to capital. Conversely, the downside of not doing so can be significant. It is not uncommon to hear a CEO or CFO blame currency volatility for a quarterly earnings miss, and examples - even among the largest corporations- can easily be found. By implementing an effective cash flow risk management program that works with its balance sheet hedging program, a firm will greatly reduce the probability of ever having an earnings miss due to FX.
Implementing a practical and effective cash flow program has three main elements:
Currency Risk Management has proven strategies for meeting each of these challenges. We present here a high-level view of some of our processes. For a more detailed discussion, please refer to our article in Treasury & Risk on "Cash Flow Hedging Best Practices".