CFOs seem well aware of the pitfalls of hedging and are not requesting elaborate programs, says Hodzic. "The types of derivatives they want to use are quite simple," she says. "The complex derivative products of a few years ago are gone. It's much more about control and risk management. It's about limiting the downside."

For EXL's Kapoor, that's the entire goal. "We are agnostic about which way the dollar moves. We hedge on the basis of what contracts we have, and how much revenue and how much cost we have in a particular currency."

Regardless of whether a CFO feels he or she can dive into the complex world of financially hedging a company's foreign-exchange exposure, it is clear that the time is right to review currency liabilities and develop contingency plans, because the uncertainty in the dollar and its relationship with other currencies is not going away any time soon. Indeed, even Marston, who spends much of his time researching and writing about currency movements, will not hazard a guess as to the dollar's future. "I think there's a greater than 50% chance that the euro will weaken further, but that's about all I can say," he says. "It's very difficult to predict."

Kate O'Sullivan is senior editor for strategy at CFO.

Beyond the Eurozone
The next currency-risk hot spot: China

While it is the dollar's relationship to the euro that has garnered the most attention of late, another major foreign-exchange risk — one that would affect a vast number of U.S. firms — looms: the appreciation of the Chinese yuan. The Chinese government, which has long pegged the yuan to the U.S. dollar in an effort to make its exports competitive, began to let the yuan appreciate for several years before the global financial crisis. As the markets spun out of control, it returned to the dollar peg, but experts say it is only a matter of time before China allows the currency to float — and appreciate — again.

"China's currency is going to start appreciating sooner rather than later," says Richard Marston, a professor of finance and economics and director of the Weiss Center for International Financial Research at The Wharton School at the University of Pennsylvania. "Over the next 5 to 10 years, the Chinese currency and other Asian currencies will appreciate substantially against the U.S. dollar, and that's a movement CFOs have to be aware of."

IRobot, a robotics company with approximately $300 million in annual revenue, is one of many U.S. companies that would face rising costs if the yuan were to strengthen. "It will hurt companies like us and anybody who manufactures in China," says CFO John Leahy. "We're monitoring it, but we're not actively out looking at [hedging] instruments."

Even for those who do want to hedge against the risk of a rising yuan, Marston says options are few, as China strictly controls its financial markets and won't allow the creation of forward contracts, a common hedging tool.

For now, firms that manufacture or source materials in China can only watch and wait. The timing of a move "is a political decision in China," says Marston. "I'm really surprised they haven't done it already." — K.O'S.

• « previous
• 1
• 2
• 3

LinkedIn Company Connections:

• EXL |
• iRobot |
• High Street Partners |
• Lockheed Martin |
• Calypso |
• Duke University's Fuqua School of Business |
• The Wharton School of the University of Pennsylvania