From the May 2011 issue of Treasury & Risk magazine

Hedging in a Crisis

In a volatile world where currency movements are unpredictable, companies like travel arranger Tauck must react quickly.

When Japan was hit by a severe earthquake and then a devastating tsunami in March, travel arranger Tauck had nearly 1,000 customers booked for dozens of tours of Japan through the end of the year. Normally that would mean paying Japanese vendors roughly 500 million yen ($5.97 million). Normal was suddenly out of the question, and Tauck was forced to cancel its departures through May and refund customers’ deposits and prepaid fees.

Then John Cappelli, Tauck’s director of revenue management, had to deal with the yen forward contracts he had bought to hedge the company’s yen exposure.

Flexibility is a key part of a hedging policy given the extent of the global volatility, Cappelli says, adding that hedgers need to be prepared to accommodate not only disasters and revolutions but also fluctuations in customer demand.

“South Africa was a really hot destination this year,” he notes. “Our goal was to be 75% hedged ahead of time, but when sales are really booming, what you thought was a 75% hedge could turn into a 50% hedge. You have to watch sales and recast your currency exposures.”

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