Credit Congress '13: Working Capital Management Session Spotlights Foreign Exchange Risk


Foreign exchange risk is an aspect of exporting that often confounds credit professionals and their companies. Attendees of the 117th annual Credit Congress, and specifically those that took part in FCIB's International Track, held in conjunction with this year's Credit Congress, the mystery of hedging foreign exchange risk was unraveled during Wednesday afternoon's Working Capital Management and Cash Flow Forecasting session.

Led by moderator Patrick Spargur, ICCE of Bally Technologies with a panel comprised of Gent Culver, CICP of International Game Technology and Scott Edgeworth, also of Bally Technologies, the session offered a fascinatingly no-nonsense look into how foreign exchange affects a company's working capital, and at what point a company should consider implementing an F/X risk hedging program.

“It depends on the size of those foreign sales,” said Edgeworth. “If you have a small percentage of your sales that are in a foreign currency and it's not affecting your bottom line or your earnings per share, then most companies won't do it.”

For larger public companies, Edgeworth noted that the effect of foreign exchange losses on earnings per share serves as a barometer for when they'll consider initiating a process to mitigate those losses. “When it starts to move that earnings per share figure by about a penny or so, that's when they start looking at it,” he said.

The panelists also discussed currencies whose foreign exchange risk is particularly difficult to mitigate, specifically the yuan. “It's a harder currency because it's controlled by the government and I don't know what I want to do with it,” said Edgeworth, who also noted that Brazil's currency was so difficult to work with on the foreign exchange market that he implemented procedures to intervene before sales went through. “In Brazil, you might get sales, but you will never get your money out.”

Changes in currency values also affect cash flow forecasting, as panelists discussed their sources of information for what's coming next with a particular country's currency. While bank reports and currency forecasts are popular, the panelists noted that these must be taken with a grain of salt, because of how slippery these predictions can be and also because so many different factors can affect a currency's value.

- Jacob Barron, CICP, NACM staff writer

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