Software giant Microsoft sells its products worldwide through more than 10,000 distributors or partners. For the most part, these firms are billed in U.S. dollars, although they sell in their local currencies. That difference creates a currency risk, one that can literally bankrupt a distributor. Large distributors like Dell, of course, have sophisticated foreign exchange hedging programs that limit the risk of a currency's sharp devaluation. Smaller firms are a different story. "Last year, when there was a major dollar rally, some smaller distributors were literally selling our product at a loss," says Microsoft treasurer George Zinn. "They were underwater on the trade. If they go under, we then have to write off the uncollectible accounts receivable."

To provide buoyancy, treasury established a foreign exchange protection program for partners billed in U.S. dollars, utilizing its own balance sheet and capital markets infrastructure to offer them a cost-effective hedging mechanism. "Many small distributors lack access to the capital markets to effect a sophisticated currency strategy," Zinn says. "They can't go to their local banks to hedge the currency risk based on their credit, whereas we have longstanding relationships with banks and brokerages on Wall Street." The strategy eliminates the accounts receivable uncertainties, thus reducing Microsoft's credit risk. By helping to keep the distributors in business, it also reduces its market risk. "This was a strategic decision rather than a financial one," Zinn insists. "In emerging markets where we have an established presence, it's a scale game–meaning if you're starting from scratch, it's much harder to gain a foothold than if you're already there. Consequently, if we lose distributors in these regions, we're playing catch-up." Microsoft's FX Protection Program was unveiled early in 2008. Demand was sluggish until the currency crisis occurred. Microsoft charges nothing for the program, although as Zinn notes, "If there is a payoff required on the hedge, the partner owes it to us. Conversely, if the hedge goes into the money, the counterparty owes it to us and we then owe it to the partner."

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