Dec 2019. Do you understand your company’s financial risks and is your hedging strategy fit for purpose?
The backdrop of Brexit, weak economic data and an increasingly unstable political environment has further increased volatility in recent weeks, in what were already volatile financial markets. With Parliament now prorogated and the prospect of a divisive and unsettling general election very real, markets are likely to remain sensitive and on high alert.
Given these circumstances, it is particularly important that company boards have a strong handle on their organisation’s financial risk policy and hedging strategy. Boards need to ensure these remain fit for purpose by asking themselves the right questions and, ultimately, determining whether further risk mitigation is necessary.
As we draw ever closer towards the latest Brexit deadline of 31stOct 2019 Sterling has seen significant moves in both FX and Interest Rate Markets. In recent days the pound has rebounded almost 3% after parliament voted to compel the government to request a further extension from the EU to avert a no-deal exit. Prior to this Sterling had shown significant weakness against the Euro, and against the US Dollar had fallen below 1.20 for only the 2ndtime in 35 years! Perhaps less visibly, UK interest rates have also been falling to near all-time lows as weak data shows a slowing economy and threat of a potential recession.
Whilst it is difficult to predict the market’s reaction to future events, one thing is for sure, extreme events are becoming more frequent which increases the risk of losses from market dislocation. This creates the need for a continuous approach to reviewing and amending your company’s risk management framework and associated hedging strategies.
Company boards should be asking themselves a number of questions, For example:
- What is our appetite for financial risk?
- What is our Value at Risk?
- What is the maximum loss the business is willing to accept through a defined business cycle?
- Is our Treasury policy and existing hedge strategy still fit for purpose and does it still provide the right level of protection?
This kind of analysis will ultimately help you gain an appropriate understanding of your financial exposures, determine any changes to current policies and implement a successful and up-to-date risk management framework to operate within.
At Bell Rock Financial, we have the expertise and independence to help you build an optimal strategy aligned to your risk management framework. As a result of our work, you will have the confidence and knowledge that your risk framework and strategy has been robustly stress tested against your financial objectives. Once you are at the point of implementation, Bell Rock can also help you with price discovery, pricing tension and execution across your preferred financial partners.
Rest assured, at the end of this process you will have a robust understanding of your financial exposures and how your hedging strategy is likely to perform through volatile events and markets. We will ensure you have a clear understanding of your strategy’s benefits, costs (cash and opportunity), and any disadvantages. You and the board will be left with the feeling of confidence gained from knowing that you have proactively managed a significant risk within the business, safe guarding cashflows and protecting the balance sheet for future growth and success.