Insight: Exchange Rate Volatility Concerns Top CFOs

Image via Flickr by Luciano Belviso

The latest findings from the American Express CFO Research Global Business and Spending Monitor reveals that exchange rate volatility remains a top concern for CFOs across the nation. The fifth annual survey shows that exchange rate instability remains a major concern for CFOs navigating an increasingly complex global market. The result? Corporations are increasingly moving allocations into U.S. Treasuries, signaling a shift towards safety rather than profit yield and risk.

The Indian currency, in particular, is what’s giving CFOs concern over a volatile market. In today’s market, the rupee’s value is affected by both domestic and international factors, whereas it was RBI-managed in the pre-2008 recession. Still, it’s not unlikely for the value of the rupee to shift up to 30 percent within a 12-18 month period. Such volatility has created a stronger demand for the USD around the world despite economic and political struggles in the US. With the European debt crisis and weak growth in the West, the USD has become an international safe haven.

How CFOs are Addressing Exchange Rate Volatility

As volatile markets continue to concern top CFOs, finance professionals are continuously examining ways to strengthen their business models and how to respond. Short-term and long-term currency fluctuations create a unique blend of concerns, but CFOs have increasingly found a host of volatility solutions. These strategies include, but are not limited to:

  • Operational hedging. Through operational hedging, CFOs are able to mitigate risk by increasing flexibility throughout the company’s workflow processes. Whether it’s the supply chain or distribution channels, increased flexibility creates a company environment that can respond quickly to market changes. In conjunction with a solid business strategy, operational hedging yields adaptable results.
  • Qualifying the risk. CFOs of globalized companies are beginning to purchase and sell in the same currency when working in the same market. By focusing on individual markets based on geography or product-type, CFOs are able to work in a more logical framework while reducing the risk of exchange gains or losses.
  • Acknowledging the impact of currency. Before implementing any of these other strategies, CFOs must first understand how their company in particular is affected by currency fluctuations. Since currency fluctuations can happen in an instant, it’s critical for CFOs to have a comprehensive understanding of any potential impact so they can respond quickly and accordingly.