Corporate treasurers are no strangers to the obstacles restless currency markets can create for cash management and accounting, yet few anticipated the currency turbulence of 2015. To help conquer any issues, CFO offers the following stories and content on foreign exchange risks, hidden costs of international payments, foreign market fixed rates, and multinational margins.

What CFOs Should Know About Foreign Exchange Risks

In January 2015, Alan Lafley, the chief executive officer of Procter & Gamble,  stated that the strong dollar would shrink the company’s fiscal 2015 sales by 5% and its net earnings by 12%, or about $1.4 billion after taxes. Like other U.S.-based multinationals, P&G uses long-term hedging to reduce the volatility  spawned by fluctuations in foreign exchange rates. But there are risks involved in forex hedging itself.

One long-term hedging technique includes two currency swaps: one swap at the inception of the loan contract and the other swap at the specified future date. Although analysts tend to prefer long-term hedging over short-term hedging,  the long-term variety can lead a MNC to be over-hedged. Understanding forex risk in the context of enterprise risk management enables finance chiefs to not fall into the trap of over-hedging their forex risks. Read full article.

The Hidden Cost of International Payments

International payments arise in a host of situations in a global economy. A U.S. company acquires equipment, raw materials, products, or services from overseas; a manufacturing facility in a foreign country requires cash transfers between it and the U.S.-based parent company; revenue coming in from an overseas subsidiary denominated in the foreign currency has to be converted; and payments have to be made to a foreign contractor or bank.

But many U.S. organizations manage international currency payments in a way that unnecessarily increases the cost of the products or services they import from overseas, and it puts them at a significant disadvantage when competing internationally. In particular, there are two commonly held beliefs in international trade that are costing U.S. companies billions of dollars annually. Read full article.

The Foreign-Exchange Market: Fixed Rates

A City worker looking for a quiet place to nap nowadays could do worse than head for his bank’s foreign-exchange (FX) trading floor, writes The Economist. Once noisy with activity as gesticulating dealers moved around billions of dollars, euros and yen, it is more likely now to be an oasis of calm. Bankers are plain bored. “The FX market has been exceptionally quiet,” moaned currency analysts at Citigroup recently. “In fact, it’s been so quiet that there was almost no point in writing this report.”

 Regulators across the world are probing the role of banks in currency trading, apparently convinced it is the latest financial market to have been fiddled. Around 30 bank staff, including many trading-floor bosses, have been suspended or fired. Hefty fines seem inevitable. Worse, reforms may tear the heart out of the FX market as it is presently constituted. Banks, which make money by offering to buy or sell currencies from or to their clients, could go from being central actors to bit players. The future of a business which used to reap annual revenues of $20 billion is at stake. Read full article.

Strong Dollar Plays Havoc with Multinationals’ Margins

Analyzing the variance in operating margin (OM) between plan and actual results is an important tool for finance professionals. This article will consider the potential OM variance related to fluctuating foreign exchange (FX) rates.

As companies have reported their results for the first quarter of 2015, the impact of FX on operating profitability has hit home and, in many cases, hit hard.

While it may be less expensive to travel to Europe this summer, the stronger U.S. dollar can create significant weakness in short-term OM. Naturally, there are times when circumstances work to a U.S. domestic company’s favor, typically when the dollar is weakening. The tricky part in late 2014 and early 2015 was the speed and magnitude of the dollar’s ascent against the euro and yen, which caught many companies by surprise. Read full article.

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