FX Risk Management Framework
Risk management is evolving and adapting to the external factors that provide strong incentives to develop new risk management techniques. Whether this is because the world has become riskier or because we are simply more aware of the risks we face, the fact is that knowing and controlling risk has moved to the front and center in the minds of many corporate boardrooms.
Current trends in risk management show a gradual paradigm shift in the way companies choose to look at and manage their risks.
Take for example foreign exchange risk. Where traditionally the focus was more on the volatility and correlations of currency pairs, the approach is shifting to FX risk management with a more agnostic view.
Corporate risk managers are moving down to the grass roots of their companies’ exposure sources, mapping currency flows and building comprehensive knowledge of the exposures. Companies are looking internally first before shopping externally for suitable hedging solutions.
Zanders embraces this trend as it is very much in line with our view on FX risk management. Based on our years of experience in advising our clients on risk management, we are currently formalizing the Zanders FX Risk Management Framework.
This framework consists of five pillars: Identification, Quantification, Policy, Process and Execution. It covers the corporate FX risk management process end-to-end and enables a structured, efficient and effective approach in risk understanding and mitigation.
Identification focuses on finding and mapping the key risk sources. Subsequently we determine the magnitude of the exposure in the Quantification phase. The next step is to draw up a risk policy that incorporates the company’s risk appetite and describes what, how and when exposures have to be hedged.
Successful implementation of the policy is secured in the design of the risk management process. Execution aims to improve the day-to-day risk management and the periodic closing activities.
Our framework can be used not only to design and implement a completely new FX risk management strategy and process but also to redesign and implement a part of your existing framework.