Hedging the currency risk generated by a global business's anticipated future cash flows can be a bewildering task. Uncertainties inherent in revenue and cost projections, as well as the complexity of the foreign exchange (FX) market and related derivatives, all may contribute to concerns about the efficacy of hedging activities. Yet a well-constructed cash flow hedging program is worth the investment of time and effort.
A corporation's valuation is based on the size and stability of its future cash flows, so if it can reduce its earnings volatility, it will increase its valuation and access to capital.
For global businesses, FX hedging of cash flows is key to avoiding sharp swings in earnings, and companies that do a poor job of managing FX risk may suffer significant volatility as a direct result. Even among the largest corporations, it is not uncommon to hear a CEO or CFO blame a quarterly earnings miss on movement in the currency markets.
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