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Market risk management – what treasurers need to consider during the Covid-19 crisis


There is no bigger focus for corporate treasuries these days than managing the impact of Covid-19 on their organization. And while cash is truly king currently, both the current hedge book as well as future strategy to deal with market risks are of high importance as Holger Zeuner, Head of Thought Leadership EMEA within HSBC’s Global Markets Corporate Sales team explains.

What makes hedging so difficult in the current environment ?

There are four factors coming together on this: First the economic outlook for the underlying business has become highly uncertain, making previous volumes and maturities hedged often become highly fuzzy. Then market volatility has come back with a vengeance to many currency pairs, commodity prices and interest rates. Also, with remote working being the new norm, there is an increase in operational risk in executing the chosen strategy while being away from the usual setup. And finally this has been met by a reduced market liquidity as bank trading desks have been operating in the same way.

“All of those factors together can turn into an ugly situation for some corporates” according to Zeuner. Higher volatility will indicate lower risk tolerance when traditional risk measures like Value-at-Risk or historic scenarios are updated. When this meets a reduced certainty on underlying cash flows to occur, treasurers are faced with a challenging hedge decision.

A solution to that is more frequent communication with all internal stakeholders and bank partners to understand the current extraordinary dynamics of sales orders, supply chains and market liqudity.



Some perfect storms have already risen

But new hedge decisions are not the only source causing headaches for risk managers these days. In some situations thus called wrong-way risk has materialized on existing hedges, spilling over into liquidity planning and higher financial statement volatility. “This has happened when underlying cash flows hedged are no longer likely to occur and the FX move has led to a negative “mark-to-market” of the derivative”, explains the HSBC expert. As an example he cites European corporates that had hedged Dollar revenues or Emerging Market cost bases in e.g. Mexican Peso or Polish Zloty. If such underlying cash flows are falling away, designated hedge accounting relationships could break and require the derivative value to be realized as a loss. This could cause further stress not only on financial results but also corporate cash when the hedge is due for settlement. In the more dire cases it could also impact the ability for additional credit being available from the bank counterparties.

“Options have proved to become an asset in a liquidity stress situation.” 

Holger Zeuner, Head of Thought Leadership EMEA, HSBC’s Global Markets Corporate Sales

Setting sight ahead – a crisis as catalyst for change

For those who have successfully avoided or tackled above issues, it’s worth to think ahead: How will any “new normal” future of your business impact your risk management needs? It’s not to be decided tomorrow, but once financial stability and funding is secured, a critical review of your treasury policy should be undertaken. The HSBC banker sees three potential trends to prevail from this. First there is a strong prioritization within digital investments to those with immediate impact – ability to collect and process payments online being on top of many lists. Then it’s added flexibility to the instruments and hedge ratios defined in the policy. Especially those suffering from the wrong-way risk impact above might think more loudly about FX options: “We have seen an uptick in option-based solutions when Brexit was the main concern for many companies already. But the current business uncertainty is far more widespread and options have proved to become an asset in a liquidity stress situation”, says Zeuner. Finally he expects more companies to increase the weight of regional treasury centers in managing risks. As long as the virus risk remains on global trade and supply chains, more local solutions ensure operational readiness and the ability to react quickly. Having a strong global bank partner at your side you understands and follows such organizational decisions, will help on this journey. And the latest trend certainly would be a welcome sight for the Luxembourg treasury community as well.



Holger Zeuner, Head of Thought Leadership EMEA, HSBC’s Global Markets Corporate Sales

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