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2017 California Export Guide



areth Sylvester, senior vice presi-

dent and foreign exchange advi-

sor at Bridge Bank discusses what

exporters need to know about

mitigating risks and exposure related to

foreign exchange (FX).

What can you do to protect your

company against FX volatility?

Business leaders need to

understand their exposure to foreign

exchange (FX) volatility and the risk it

presents to their companies.

First and foremost, it’s about understanding what your actual

exposure is; quantifying it and then understanding your own

risk tolerances and desired outcome for managing the risk.

Moreover, it’s essential that FX risks be proactively vs. reac-

tively managed.While there is never a “perfect hedge,” even

establishing the simplest policy to mitigate a portion of your

exposure is better than no hedge at all.

You need to be able to position your business to tackle FX risk

from a position of strength rather than making decisions due to

fear, lack of preparation and urgency.

What are the greatest concerns for businesses when it comes

to FX exposure?

In the case of most treasurers, it is the financial impact on the

businesses from excessive FX market volatility or a rapid appre-

ciation/depreciation of a currency that creates the greatest of

concerns. Regardless of whether you are importing or export-

ing, the fears remain the same.

What is the impact on my payables/receivables from FX

volatility, and how does this affect an exporter’s competitive-

ness, from a product pricing perspective within a particular

region of the world?

While most treasurers will factor into their budget a degree of

FX volatility, a significant adverse FX swing can result in at best,

a small decrease in the value of your expected receipts. At worst,

it can result in your product or service no longer being price

competitive in a certain geographical region.

Where should a business leader begin in trying to proactively

address these risks?

The first thing is to identify in what form the FX exposure risk

arrives. Is it transactional, translational or economic in nature?

In most instances, businesses are faced with transactional risk

wherein the value of their payables/receivables is affected by FX

market moves.

When does the business recognize a transactional FX exposure?

Does it happen at the time an invoice is received or submit-

ted, when cash is paid or received or on historical business

trend and volumes? Once the exposure is identified, the second

stage is to measure and quantify this risk and the potential im-

pact to the business. Depending on the size of the international

exposure, some organizations will also assess the impact on

their margins in order to assess risk. The next step is to deter-

mine your goals for managing the FX risk.

Are you looking tominimize earnings volatility, for example?

You also want to gauge what level of risk exposure the com-

pany is prepared to take. This will help calculate the correct

volumes to be hedged, over what time horizon and perhaps

even the hedging instruments. Lastly, and crucially, it is impera-

tive to measure the effectiveness of the hedge program. Did you

achieve your goals? Did it minimize the effects of FX volatility? If

so, that’s great news, but you’ll still want to review again in three

to six months. If not, you need to adjust your hedge approach

and review it again in three months.

How difficult is FX management in terms of the need

to go back and make adjustments as conditions in the

market change?

Any foreign exchange hedging program should have clear

and defined objectives. The FX policy is intended to be a living

breathing document. A hedging framework and policy docu-

ment should never be drafted, signed off, filed and ignored. It

is paramount that periodic effectiveness reviews are conducted

to ensure that the key objectives for managing the FX risk in

the first place are being met. Failure should prompt a process

review in order to determine where the inefficiencies are arising

and what can be done to rectify these concerns.

More information about FX strategy is available by contact-

ing Gareth Sylvester, 408-556-8640.

Q&A: Bridge Bank’s Gareth Sylvester

Talks About Foreign Exchange

Gareth Sylvester