Mathias Tillman, CFO of German metasearch platform Trivago, is keeping his eye on his company's revenue generated from its U.S. operations. If that revenue starts to compare to what the company generates in Europe, its main market, he expects to make a currency play — a hedge against swings in exchange rates — to protect Trivago’s margins against the dipping U.S. dollar.
"If we get to a level more similar to what we have in Europe [with our American revenue]," Tillman said in a report on Friday in The Wall Street Journal, "then we need to think about it and then we need to start hedging that way."
CFOs in countries around the world are making similar calculations because of volatility in foreign exchange rates that the novel coronavirus outbreak has unleashed.
The U.S. dollar has seen big swings since the outbreak spurred the Federal Reserve to cut its short-term rate by half a percentage point and then again to almost zero. Last week, the dollar took its biggest dip against major currencies — 0.6% — since June of last year, and then quickly rose 1.1%, to $91.80.
That kind of volatility makes it hard for finance chiefs to predict future earnings, Helen Kane, chief executive of consulting firm Hedge Trackers, told the Journal.
Companies hedge by entering into derivative contracts that reduce their susceptibility to unpredictable financial performance.
Change in plans
Many companies set hedging strategies at the beginning of the year, but with the virus outbreak, finance chiefs that have already set their strategies should revisit them to see if they need revamping. And those that never set one should look at whether they need to put one in place, Sharon Virag, a retired finance executive, told the Journal.
Christopher Masterson, CFO of New York-based real-estate investment trust Global Net Lease, said he’s watching his company’s foreign currency exchange risk and is ready to act against unfavorable movement in the euro or pound against the U.S. dollar.
"The strategy is employed by layering in cash flow hedging instruments, primarily FX [foreign exchange] forwards, over a forward-looking three-year period in order to fix exchange rates for the conversion of pound and euro net cash flows into U.S. dollars," Masterson said.
Kevin Ingram, finance chief at FM Global, a Johnston, R.I.-based mutual insurance company, hasn’t changed his currency hedging strategy but he told the Journal he’s monitoring the situation. If the company sees a spike in the number of insurance claims related to communicable diseases in a jurisdiction where it didn’t have premiums in the same currencies, he said, he’s more likely to pursue hedging.
Finance chiefs at companies with even minimal international exposure could be in for a rude awakening if volatility persists and they don’t have a strategy in place, Kane of Hedge Trackers said. For example, a manufacturing company that sources materials internationally but sells products in the U.S. could see its profit margins disappear if the dollar stays down because of the differences in exchange rates.
"Gross margin is where companies first learn the lessons — sometimes very harsh lessons — why they need to hedge," she told the Journal.