In the past two years, multinational companies have lost at least $68 billion as a result of currency surprises. In 2013, the average impact to earnings per share (EPS) from currency surprises was US$0.03. Considering that foreign exchange (FX) managers from leading multinationals have management objectives of less than $0.01 EPS impact from balance sheet exposures, an average $0.03 hit to EPS from all exposures is large and material.
Why do some companies continue to experience these kinds of currency surprises? When surprises are frequent, it is a sign that the company doesn't have accurate, complete, and timely visibility into its foreign currency exposures across its entire portfolio of currency pairs. Often, the barrier preventing a company from getting that visibility is use of inconsistent and/or improper multicurrency accounting practices.
It is said that you can't manage what you can't measure. In the world of FX, that is certainly true. When corporate treasury teams can't accurately measure their exposures—when they don't have accurate, complete, and timely visibility—they cannot possibly prevent currency surprises. It is not a question of whether hedging is effective. If the exposure data that treasury is getting from accounting is inaccurate or incomplete, which is to say if there are data-integrity issues, treasury can execute currency risk management tools within company policy and still sustain significant FX surprises.
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