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London
Wells Fargo Foreign Exchange
2018 Risk Management Practices Survey
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 2
2018 Risk Management Practices Survey
Shanghai
Wells Fargo Foreign Exchange is pleased to present our sixth biennial survey on FX risk management practices. We sincerely offer our thanks to the 330 clients who took the time to provide information necessary to create this survey and hope this latest edition continues to bring insight on establishing proper policies and procedures for managing currency risk in an increasingly global economy.
Since our last survey, we have experienced some truly unexpected political events (Brexit and the U.S. elections), as well as a shifting global interest rate environment. With this backdrop, we present the findings of our 2018 Foreign Exchange Risk Management Survey.
Survey participant composition
Annual revenue
Total respondents 330
Greater than $5 billion 16%
$1 billion to $5 billion 28%
$500 million to < $1 billion 15%
$100 million to < $500 million 22%
< $100 million 19%
Public vs. private Industry
Manufacturing 38%
Other 18%
Technology 16%
Wholesale Trade 12%
Healthcare/Pharma 5%
Finance/Insurance 4%
Energy 4%
Retail 3%
Private
Public 58% 42%Private
Public
CFO
84%
5%
2%
2%
1%
1%
1%
1%
1%
1%
Total
Base: Total respondents 330
Treasurer/Assistant Treasurer
Finance Manager/Cash Manager
CEO/President
Director of Treasury/Finance
Treasury Analyst
Risk Manager
Treasury Manager
VP/Senior VP of Finance
Controller/Account Manager
38%
16%
12%
4%
5%
4%
3%
Manufacturing
Technology
Wholesale Trade
Finance/Insurance
Healthcare/Pharma
Energy
Retail
Industry
19%
22%
15%
28%
16%
Total
Base: Total respondents 330
< $100 million
$100 million to < $500 million
$500 million to < $1 billion
$1 billion to $5 billion
Greater than $5 billion
84%
5%
2%
2%
1%
1%
1%
1%
1%
1%
1%
TotalBase: Total respondents 330
U.S.
Canada
Germany
U.K.
Austria
Japan
Bermuda
Europe
Italy
Netherlands
Switzerland
Private
Public58% 42%
CFO
38%
18%
18%
12%
3%
2%
2%
2%
1%
1%
Total
Base: Total respondents 330
Treasurer/Assistant Treasurer
Finance Manager/Cash Manager
CEO/President
Director of Treasury/Finance
Treasury Analyst
Risk Manager
Treasury Manager
VP/Senior VP of Finance
Controller/Account Manager
Industry
Greater than $5 billion 16%
28%
15%
22%
19%
Total respondents 330
< $100 million
$100 million to < $500 million
$500 million to < $1 billion
$1 billion to $5 billion
84%
5%
2%
2%
1%
1%
1%
1%
1%
1%
1%
TotalBase: Total respondents 330
U.S.
Canada
Germany
U.K.
Austria
Japan
Bermuda
Europe (non-Euro region)
Italy
Netherlands
Switzerland
Private
Public58% 42%
CFO
38%
18%
18%
12%
3%
2%
2%
2%
1%
1%
Total
Base: Total respondents 330
Treasurer/Assistant Treasurer
Finance Manager/Cash Manager
CEO/President
Director of Treasury/Finance
Treasury Analyst
Risk Manager
Treasury Manager
VP/Senior VP of Finance
Controller/Account Manager
Industry
84%
5%
2%
2%
1%
1%
1%
1%
1%
1%
1%
TotalBase: Total respondents 330
U.S.
Canada
Germany
U.K.
Austria
Japan
Bermuda
Europe (non-Euro region)
Italy
Netherlands
Switzerland
38%
18%
12%
5%
4%
4%
3%
Manufacturing
Other
Wholesale Trade
Healthcare/Pharma
Finance/Insurance
Energy
Retail
16%Technology
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 3
Executive summaryOnce again, we have polled a wide spectrum of companies across geographies and industries, of varying size, and both public and private. The information contained in these pages details how these companies evaluate FX risk, the types of exposures they hedge, how they think about budgeting, accounting, and a host of other issues.
Concern regarding FX risksOver the last several years as evidenced by our last three surveys, we have consistently seen more clients viewing FX as a greater concern than a lesser one. However, it is interesting to note that the level of concern seems to correspond to the value of the U.S. dollar. When the dollar weakened (as in the 2014 survey and the current 2018 survey), a small proportion of clients experienced greater concern. However, in 2016, when the dollar strengthened, concern was very elevated. This may indicate that more companies suffer when the dollar strengthens (as net exporters would) than when the dollar weakens.
Best practicesWe saw upticks in the use of quantitative analysis, the setting of budget rates for planning purposes, the updating of FX policies, and the minimum thresholds for counterparty creditworthiness. We would consider all of these “best practices,” as these traits were much more evident in large public companies, which tend to require heavier focus on, and investment in, managing FX-related issues.
Hedge instrumentsCompanies predominately use forwards to hedge all types of FX risk. But depending on the specific exposure, we see some variation. For example, companies are twice as likely to use cross-currency swaps to hedge balance sheet exposure related to financing versus balance sheet exposure related to trade. Furthermore, 20% of clients use some sort of option structure for hedging, with relatively more using options to hedge forecasted exposures than for balance sheet items.
Concern regarding FX risks
Attitude toward FX risk management
Best practices
Policy includes a minimum credit rating for counterparties
2016
60%
2018
67%
Use quantitative or statistical methodology to measure risk
2016 2018
17% 23%
Hedging activities
Companies that hedge at least one type of exposure
Total Large public companies
84%93%
Hedge instruments
67%
26%7%
2018
Greater concern Unchanged Reduced concern
2016
55%
38%
7%
2014
30%
2%
67%
93%13%
6%
20%3%
Forward contracts Cross-currency swaps Options Local currency debt Other
Perceptions and processes
Seoul
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 5
752014 2015 2016 2017
80
85
90
95
100
105
At the time of our previous (2015 – 2016) risk management survey, currency market conditions were highlighted by an upward trending USD, which presented headwinds to U.S. exporters, and relatively elevated currency volatilities.
The environment at the time of the present survey, by contrast, was arguably less challenging, with the USD experiencing a period of consolidation after weakening during the first half of 2017 and currency volatilities remaining relatively subdued.
USD (DXY Index) Implied currency volatilities (3m, ATMF)
Source (for USD and Implied currency volatilities charts): Wells Fargo estimates based on data from Bloomberg as of January 14, 2018
Given the generally more benign market environment, it comes as little surprise that a greater percentage of participants in the present survey indicate no change in their attitude toward FX risk management during the 12 months prior to the survey and a relatively smaller percentage indicate increased concerns.
Attitude toward FX risk management
USD/CAD
0
5
10
15
20
2014 2015 2016 2017
EUR/USDGBP/USD
Perceptions and processes
Greater concern Unchanged Reduced concern
Base: Total respondents = 287
67%
26%7%
20182016
55%
38%
7%
2014
30%
2%
67%
Base: Total respondents = 330
Base: Total respondents = 276
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 6
Perceptions and processes
Of the firms indicating increased concerns for FX risk management, adjusting hedge strategies (e.g., increasing the amounts of exposures hedged, lengthening the average maturities of hedges, and adjusting the mix of instruments) remains a focus, but these firms are also assigning priority to strengthening their risk management infrastructure (e.g., revising their FX policies and investing in systems).
Changes made to risk management
Base: Companies that view FX risk management as a greater concern2016: 159 • 2018: 85
London
Increased the amount of exposure that is hedged
Developed/revised an FX policy
System improvements/enhancements
Extended the average maturity of your hedges
Altered the mix of hedging instruments used
Decreased the amount of exposure that is hedged
Shortened the average maturity of your hedges
None yet
Other
0 10 20 30 40 50
47%35%
28%27%
26%29%
18%13%
9%13%
7%
3%5%
22%
23%8%
*No data for 2016
2016
2018
64% 66%
Yes, the company has a formal written policy for managing foreign exchange risk
Base: Total respondents = 287
Base: Total respondents = 330
2016 2018
Base: Companies that have a formal written policy2016: 184 • 2018: 216
Annually Semi-annually
Quarterly Other
78%75%
4%1%6%4%
17% 16%
2016
2018
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 7
Increased the amount of exposure that is hedged
Developed/revised an FX policy
System improvements/enhancements
Extended the average maturity of your hedges
Altered the mix of hedging instruments used
Decreased the amount of exposure that is hedged
Shortened the average maturity of your hedges
None yet
Other
0 10 20 30 40 50
47%35%
28%27%
26%29%
18%13%
9%13%
7%
3%5%
22%
23%8%
*No data for 2016
2016
2018
Base: Companies that have a formal written policy2016: 184 • 2018: 216
Annually Semi-annually
Quarterly Other
78%75%
4%1%6%4%
17% 16%
2016
2018
Base: Companies that view FX risk management as a greater concern2016: 159 • 2018: 85
Perceptions and processes
Increased the amount of exposure that is hedged
Developed/revised an FX policy
System improvements/enhancements
Extended the average maturity of your hedges
Altered the mix of hedging instruments used
Decreased the amount of exposure that is hedged
Shortened the average maturity of your hedges
None yet
Other
0 10 20 30 40 50
47%35%
28%27%
26%29%
18%13%
9%13%
7%
3%5%
22%
23%8%
*No data for 2016
2016
2018
64% 66%
Yes, the company has a formal written policy for managing foreign exchange risk
Base: Total respondents = 287
Base: Total respondents = 330
2016 2018
Base: Companies that view FX risk management as a greater concern2016: 159 • 2018: 85
FX risk management infrastructure
The focus on enhancing FX risk management infrastructure is evidenced by upticks in number of firms having an FX policy, the frequency of policy reviews, and the increasing percentage of respondents quantifying exposure to FX risk.
Have a formal written policy?
Yes, the company has a formal written policy for managing foreign exchange risk
2016 2018
64%
Base: Total respondents = 287
66%
Base: Total respondents = 330
Use quantitative or statistical methodology to measure risk
Yes, the company employs a quantitative or statistical methodology to measure foreign currency risks to financial performance
2016 2018
17%
Base: Total respondents = 287
23%
Base: Total respondents = 330
Policy includes a minimum credit rating for counterparties
Yes, the company’s risk management policy specifies a minimum acceptable credit rating for counterparties
2016 60%
2018 67%
Base: Companies that have a formal written policy 2016: 184 • 2018: 216
Frequency of policy review or update
Base: Companies that have a formal written policy2016: 184 • 2018: 216
Annually Semi-annually
Quarterly Other
78%75%
4%1%6%4%
17% 16%
2016
2018
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 8
Perceptions and processes
With relatively broader global footprints and facing more intense public scrutiny, large public companies (revenues greater than USD 1 B) are most likely to employ rigorous risk management policies and procedures that arguably may be characterized as best practices.
Yes, the company has a formal written policy for managing foreign exchange risk
TOTAL PRIVATE PUBLIC <$1B PUBLIC >$1B
66%
48%
78%
93%
Base: Total respondents
Yes, the company's risk management policy speci�es a minimum acceptable credit rating for counterparties
TOTAL PRIVATE PUBLIC <$1B PUBLIC >$1B
67%
48%
80% 80%
Base: Companies that have a formal written policy
Yes, the company employs a quantitative or statistical methodology to measure foreign currency risks to �nancial performance
TOTAL PRIVATE PUBLIC <$1B PUBLIC >$1B
23%12% 22%
42%
Base: Total respondents
Sydney
Base: Companies that have a formal written policy
Frequency of policy review
Total
75%Annually
Private
73%Annually
Public< $1 B
72%Annually
Public> $1 B
78%Annually
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 9
Perceptions and processes
Yes, the company sets budget rates for planning purposes
No
0
20
40
60
80
Base: Total respondents = 265 0 20 40 60 80 100 120
TOTAL
PRIVATE
PUBLIC <$1 B
77%
71%
93%
81%PUBLIC >$1 B
Base: Companies that set budget rates for planning purposes = 265
Yes, the company sets budget rates for planning purposes
Variance reporting only
0
20
40
60
8080%
72%
84%
94%
TOTAL PRIVATE
Base: Total respondents = 265 0 20 40 60 80 100 120
TOTAL
PRIVATE
PUBLIC <$1 B
77%
71%
93%
81%PUBLIC >$1 B
Yes, the company sets budget rates for planning purposes
PUBLIC <$1B PUBLIC >$1B
Variance reporting only
0
20
40
60
8080%
72%
84%
94%
TOTAL PRIVATE
Base: Total respondents = 265 0 20 40 60 80 100 120
TOTAL
PRIVATE
PUBLIC <$1 B
77%
71%
93%
81%PUBLIC >$1 B
Base: Companies that set budget rates for planning purposes = 265PUBLIC <$1B PUBLIC >$1B
Variance reporting only
A majority of participants continue to set budget rates for planning purposes, with large public firms nearly universal in this practice. When setting budget rates, companies often rely on consensus forecasts, a practice that tends to be most common among firms that do incorporate budget rates in hedging decisions.
FX budget rates
Yes, the company sets budget rates for planning purposes
TOTAL PRIVATE PUBLIC <$1B PUBLIC >$1B
80%
72%
84%
94%
Risk management role of budget rates
Total PrivatePublic
<$1 B >$1 B
None, only use budgetrates for variance reporting 77% 71% 93% 81%
Impact choice of hedging instruments 14% 19% 4% 10%
Do not hedge if current rates are worse than budget rates 8% 11% 4% 5%
Other 3% 2% 0% 5%
Base: Companies that set budget rates for planning purposes = 265
The following factor(s) are used in setting budget rates
Consensus forecasted rates 47%
Prevailing spot rates 37%
Prevailing forward rates 27%
Historical average rates 17%
Blend of existing hedge rates 14%
Other 5%
20%
80%
Even companies that price in USD are subject to foreign exchange risk. Of foreign transactions that are denominated in USD, two of three such prices are adjusted periodically to reflect changes in exchange rates.
Are USD prices adjusted in response to FX changes?
Base: Prices set in USD
Hong Kong
14% 13%
41%
32%
38%
13%
33%
16%
10%
38%
17%
35%
16%
6%
48%
30%
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 10
Perceptions and processes
0
10
20
30
40
50
ALL PRIVATE PUBLIC <$1 B PUBLIC >$1 B
Revenues only Vendor costs/expenses only Both are adjusted Neither are adjusted
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 11
U.S. more attractive relative to foreign countries
Made business in the U.S. and in foreign
countries less attractive
Had no impact on operations in the U.S. or
in foreign countries
All participants
Large public �rms
Perceptions and processes
Made business in foreigncountries more attractive
relative to the U.S.
Made business in the
0
5
10
15
20
25
30
35
41%
21%
39% 38%
34%
48%
ALL PRIVATE PUBLIC <$1 B PUBLIC >$1 B
U.S. Non-U.S.
Base: Total respondents = 330
Business effects of regulatory changes during the past two years
More than1/3of the large public companies participating in the survey indicate that U.S. or foreign regulations have either made hedging more difficult or affected trading negatively. Small public firms and private companies appear less affected by regulatory changes.
Percent reporting negative effects from U.S. and non-U.S. regulations on FX risk management during the past two years
4%
4%3%
9%14%
84%80%
11%8%
12%
28%
16%19%
17%
31%
For public firms, the accuracy and timeliness of data has become the greatest FX risk management challenge.Private firms participating in the survey report that market volatility, when to hedge, and using a proper strategy remain the greatest challenges.
Greatest FX risk management challenge: 2018
By private/public
2016Private Public
Market volatility, when to hedge, and the proper strategy63% 37%
Accuracy and timeliness of data13% 33%
Approvals, communications, and internal resources13% 11%
Hedge accounting and compliance7% 16%
Other4% 4%
2018Private Public
Market volatility, when to hedge, and the proper strategy55% 28%
Accuracy and timeliness of data21% 47%
Approvals, communications, and internal resources13% 9%
Hedge accounting and compliance5% 13%
Other6% 4%
Base: Total respondents
43%
32%11%
8%
6%
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 12
Perceptions and processes
Market volatility, when to hedge, and using a proper strategy
Accuracy and timeliness of data
Approvals, communications, andinternal resources
Hedge accounting and compliance
Other
Hedging activity
MadridMadrid
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 14
Hedging activity
Hedge recorded foreign currency trade-related balance sheet items*
Hedge recorded foreign currency finance-related balance sheet items**
Hedge forecasted foreign currency revenues or expenses***
Hedge without benefit of hedge accounting to offset the potential negative impacts of FX earnings translation risks**** Hedge equity net investments in (positive net
worth of ) subsidiaries****
Base: *Respondents with trade-related balance sheet items**Respondents with finance-related balance sheet items ***All respondents ****Respondents with local/foreign currency functional subsidiaries
Hedge practices
0 20 40 60 80 0 20 40 60 80 0 20 40 60 80 0 20 40 60 80
Forward contracts
Cross-currency swaps
Options — breakdown below
Other
Hedge instruments
Known, recorded balance sheet items and forecasted foreign currency transactions remain the exposures most commonly hedged by survey participants. Net investment and foreign earnings translation exposures are less commonly hedged.
Hedge practices
Total Private Public < $1 B Public > $1 B
FX forwards remain the instrument of choice for firms that hedge currency exposure. Roughly one in five include options in their hedging programs, and a similar proportion of large public firms employ cross-currency swaps.
Hedge instruments
Total Private Public < $1 B Public > $1 B
Base: Companies that hedge any foreign currency exposure Total PrivatePublic
<$1 B >$1 BOptions (breakdown) 20% 20% 12% 22%
Purchased options 11% 11% 4% 13%Option collars 7% 5% 8% 10%Participating forwards 6% 7% 4% 6%Forward extras 4% 3% 4% 6%Average rate 1% 1% 0% 2%
93%13%
20%6%
98%
22%21%
10%
92%
12%16%
4%
89%
20%7%
4%
84%
83%
65%
18%
17%
58%
42%
64%
9%
12%
71%
63%
62%
12%
14%
77%
50%
44%
0%
11%
_________________________________ _______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ___________________________________
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 15
Balance sheet exposuresBalance sheet positions remain the most commonly hedged exposure.
Companies that hedge nonfunctional currency booked assets or liabilities
73%Roughly three in four companies hedge nonfunctional currency booked assets or liabilities.
Half of the respondents that hedge balance sheet exposures hedge over 75% of the exposure while the majority of hedgers also keep hedge tenors to less than three months.
Percentage of balance sheet positions hedged
Companies that hedge trade-related foreigncurrency accounts = 149
75% or more 48%
50% to < 75% 22%
25% to < 50% 10%
< 25% 20%
Companies that hedge �nance-related foreign currency accounts = 103
75% or more 53%
50% to < 75% 24%
25% to < 50% 9%
< 25% 14%
Maturities of balance sheet hedges
Companies that hedge trade-related foreign currency accounts = 149
12 months or more 10%
6 to < 12 months 12%
3 to < 6 months 9%
<1 to < 3 months 69%
Companies that hedge �nance-related foreign currency accounts = 103
12 months or more 16%
6 to < 12 months 13%
3 to < 6 months 10%
<1 to < 3 months 61%
Hedging activity
0
20
40
60
80
0
20
40
60
80
63%71%
57%
88%Finance-related
Trade-related
0
20
40
60
80
0
20
40
60
80
63%71%
57%
88%Finance-related
Trade-related
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 16
Hedging activity
Yes, the company elects hedge accounting under ASC 815 (FAS 133) for balance sheet hedges
0
20
40
60
80
>$1 B
0 30 60 90 120 150
TOTAL
PRIVATE
PUBLIC <$1 B
92%
89%
85%
97%PUBLIC >$1 B
Use of forwards, cross-currency swaps, and currency options
Forward contracts remain the most popular instrument for hedging balance sheet exposures.
Balance sheet position hedge instruments
Trade-related2016 2018
Forward contracts96% 95%Cross-currency swaps7% 8%
Purchased options9% 7%
Participating forwards4% 6%
Option collars6% 5%
Forward extras1% 1%
Other4% 3%
Finance-related2016 2018
Forward contracts90% 86%Cross-currency swaps10% 18%
Purchased options5% 6%
Forward extras3% 4%
Option collars6% 2%
Participating forwards3% 1%
Other4% 7%
Some companies seem to be replacing forward contracts with cross-currency swaps for hedges of finance-related positions. Respondents hedge balance sheet positions 21% of the time with instruments other than forward contracts.
Most companies do not apply special hedge accounting treatment to hedges of balance sheet positions.
Hedge election for balance sheet positions
Trade-related Finance-related Yes, the company elects hedge accounting under ASC 815 (FAS 133) for balance sheet hedges
TOTAL PRIVATE PUBLIC <$1B PUBLIC >$1B
35% 37%
25%
36%
Base: Companies that hedge foreign currency trade- or �nance-related balance sheet items
Type of hedge designation(s) for trade-related positions
Cash �ow hedge 69%
Fair value hedge 42%
Roughly one in three balance sheet hedging companies elect hedge accounting.
Type of hedge designation(s) for finance-related positions
Cash �ow hedge 50%
Fair value hedge 53%
30%
70%
Yes, elect hedge accounting under ASC 815 (FAS 133) for your trade-related balance sheet hedges
No
29%
71%
Yes, elect hedge accounting under ASC 815 (FAS 133) for your �nance-related balance sheet hedges
No
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 17
Hedging activity
Cash flow exposuresNearly two in three survey participants hedge forecasted transactions.
Companies that hedge forecasted foreign currency revenues and/or expenses
Total
62%PRIVATE 64%
PUBLIC 60%
62% VS. 63%The percentage of survey participants hedging forecasted transactions remains similar to the 2016 survey.
Respondents that hedge forecasted transactions tend to hedge for longer than one year and hedge coverage is generally less than 75% of the forecasted amount.
Maximum maturities for hedges of forecasted transactions
More than 40% hedge to a maximum maturity exceeding one year, and another 38% hedge to a maximum maturity falling between nine and 12 months.
3 months or less 10%
6 months 10%
9 – 12 months 38%
18 months 16%
2 years 12%
Greater than 2 years 14%
Percent of forecasted transactions hedged
Less than 25% 16%
25% to less than 50% 19%
50% to less than 75% 37%
75% or more 28%
The categories in this figure represent average coverage ratios for hedges of all maturities.
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 18
Hedging activity
Base: Companies that hedge forecasted REV or EXP (n=206)
64%21%
15%
Systematic risk management
Active hedging
Dynamic hedging
The use of forward contracts is nearly universal for hedges of forecasted transactions. Non-forward hedge solutions are more common for forecasted transactions than for balance sheet positions.
Forecasted transaction hedge instruments
Forward contracts90%
Purchased options12%
Cross-currency swaps8%
Option collars7%
Participating forwards6%
Forward extras3%
Other2%
27%of respondents hedge with instruments other than forwards
Base: Companies that hedge forecasted REV or EXP (n=206)
Approach to hedging forecasted transactions
When hedging forecasted transactions, survey participants tend to take a systematic approach and often layer their hedges.
Base: Companies that hedge forecasted REV or EXP (n=206)
Systematic risk management: Hedging a fixed amount of forecasted foreign currency transactions over a specific time period at regular intervals using specific hedge instruments.
Active hedging: Discretionary hedging of forecasted foreign currency transactions based on market conditions that allows for extending the hedge horizon, changing targeted percentage amounts or discretion in the hedge instrument.
Dynamic hedging: Using discretion not only when initiating hedges, but also during the life of the hedge.
Hedging program implementation
Large or public companies are more likely to layer their hedges over time while more small or private companies use a rolling approach.
Layering 47%
Rolling 36%
Static 10%
Other 7%
Base: Companies that hedge forecasted REV or EXP (n=206)
Base: Companies that hedge forecasted REV or EXP
Private
122
Public
84
<$1 B
113
> $1 B
93
Layering: The same exposure is hedged at multiple points in time. Hedge coverage of a single exposure is 'ramped up' over time.
35% 63% 31% 66%
Rolling: For each exposure, a single hedge is executed. Hedges are executed on a regular basis and with a consistent tenor to extend the hedge horizon.
44% 25% 46% 25%
Static: All hedges are placed at the beginning of the fiscal year and no additional hedges are placed until the next year.
14% 5% 16% 3%
Other 7% 7% 7% 6%
15%Dynamic hedging
21%Active hedging
64%Systematic
risk management
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 19
Hedging activity
Hedges of forecasted transactions can be used to accomplish multiple objectives.
0 10 20 30 40 50 60 70 80Ranked 1st Ranked 2nd Ranked 3rd
Purpose for hedging forecasted transactions
Base: Companies that hedge forecasted REV or EXP (n=206)
Base: Companies that hedge forecasted REV or EXP
Private
122
Public
84
<$1 B
113
> $1 B
93Protect cash flow/margins at the entity level
26% 29% 27% 27%
Protect earnings at the consolidated level by hedging transactional cash flow
19% 38% 22% 32%
Protect both cash flows and earnings
51% 30% 47% 37%
Other 4% 3% 4% 4%
Objectives for hedging forecasted transactions
Base: Companies that hedge forecasted REV or EXP = 206
70%of companies indicate that smoothing the impact of FX rates is one of their top three risk management objectives.
Smooth the impact of changes in FX rates over time on our
company’s nancial performance70%
Protect budgeted results 53%
Assist in senior management's abilityto forecast our nancial performance 45%
Hedge rates are an important input tothe pricing of our goods/services 11%28%
Manage FX risks related to capital project 15%
Other 4%
Other
4%
27%Protect cash �ows/
margins at theentity level
27%Protect earnings atthe consolidated level by hedging
transactional cash �ow
42%Protect both
cash �ows and earnings
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 20
Base: Companies that designate cash �ow hedge: 104
33%
28%14%
25%
22%
Banking partner
Accounting/audit �rm
Internalsoftware
Other third-party vendor software
None3%Other
0
20
40
60
80
Hedging activity
Hedge accounting practicesHalf of companies that hedge forecasted transactions apply cash flow hedge accounting treatment.
Accounting convention to record foreign currency revenues and expenses
The average monthly rate is the most common accounting convention for foreign currency denominated transactions.
Elect hedge accounting under ASC 815 (FAS 133) for hedges of forecasted transactions
TOTAL PRIVATE PUBLIC <$1B PUBLIC >$1B
50%
36%
64%
73%
Base: Companies that hedge forecasted REV or EXP
The percentage of respondents electing special accounting for hedges of forecasted transactions decreased from 57% in 2016 to 50% in 2018.
Large public firms are far more likely to elect hedge accounting treatment for hedges of forecasted transactions than private firms.
Assistance with hedge accounting
Banking partner33%
Accounting/audit firm28%
Other third-party vendor software25%
None22%
Internal software14%
Other3%
One in three companies utilize assistance from their banking partner.
8%Other
34%Average/month
33%Daily spot
25%Prior
month-end spot
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 21
Hedging activity
Translation exposuresHedges of foreign earnings translation or net investment related exposures are less common than hedges of balance sheet or forecasted exposures.
Currently hedging equity net investment in foreign subsidiaries
Total
12%PRIVATE PUBLIC
9%
14%
Currently hedging or in the past hedged equity net investment in foreign subsidiaries
Total
20%PRIVATE PUBLIC
12%
27%
A minority of companies hedge, or in the past have hedged, their equity net investments in local currency functional subsidiaries.
Currently hedging translated value of foreign currency net income
Total
14%PRIVATE PUBLIC
12%
16%
Currently hedging or in the past hedged the translated value of foreign currency net income
Total
18%PRIVATE PUBLIC
14%
21%
About one in seven companies report hedging the translated value of foreign currency net income.
TOTAL PRIVATE PUBLIC < $1B PUBLIC > $1B
Currently In the past Now or in the past
14%
18%
12%
3%
14%
11% 11%
22%
17%
4%
21%
4%
TOTAL
Currently
PRIVATE PUBLIC < $1B PUBLIC > $1B
In the past Now or in the past
Hedging activity
TOTAL PRIVATE PUBLIC < $1B PUBLIC > $1B
Currently In the past Now or in the past
TOTAL
Currently
PRIVATE PUBLIC < $1B PUBLIC > $1B
In the past Now or in the past
12%
8%
20%
9%
4%
12%
7%
0%
7%
18%
14%
32%
Hedging translation exposures by firm ownership and size Large public companies are relatively more likely to hedge net investment positions. Both private and large public companies indicate greater hedging of foreign earnings translation exposures than in the past.
Firms that hedge equity net investments in (positive net worth of) foreign subsidiaries
Firms that hedge without the benefit of hedge accounting to offset potential negative effects of earnings translation risks
14%
18%
12%
3%
14%
11% 11%
22%
17%
4%
21%
4%
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 22
12%
8%
20%
9%
4%
12%
7%
0%
7%
18%
14%
32%
Hedging activity
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 23
Exposure uncertainty, including the timing of settlement of balance sheet items, is the second most common factor inhibiting hedging after small exposure size. Resource constraints and other limits on the identification, tracking, and forecasting of exposures also present challenges to hedging.
Why participants do not hedge trade- and finance-related balance sheet positions
Trade-related2016 2018
Risk is too small47% 45%
Settlement of accounts payable/receivable is uncertain and we wish to avoid cash settlements
on balance sheet hedges24% 25%
Constrained resources to manage the positions effectively27% 17%
Hedge cost is too high16% 15%Lack of the ability to track and understand the size of the risks13% 15%
Base: Companies that do not hedge trade-related foreign currency accounts
Finance-related2016 2018
Risk is too small37% 42%
Timing of repayment of loans is uncertain and we wish to avoid cash settlements on
rolled hedge contracts
32% 23%
Intercompany loans are classified as long term in nature
34% 20%
Hedge cost is too high12% 13%
We are constrained by credit2% 10%We designate FX denominated
liabilities as a hedge of our foreign net investment
7% 5%
Base: Companies that do not hedge finance-related foreign currency accounts
Why they do not hedge forecasted revenues or expenses
2016 2018
Risk is too small38% 39%
Unable to accurately forecast our exposures32% 29%
Hedge accounting is difficult17% 20%
Senior management does not believe in hedging23% 18%
Lack the expertise/resources to hedge our forecasted
exposures effectively11% 15%
Do not fully understand our risks6% 8%Base: Companies that do not hedge forecasted transactions
2016 2018
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 24
Hedging activity
0
20
40
60
0
20
40
60
80
Forward contracts Cross-currency swaps
Summary: Balance sheet hedging, by firm ownership and sizeLarge public companies are relatively active hedgers of balance sheet items. When hedging, they are more likely to rely on forwards and cross-currency swaps and less likely to use options than private firms.
Yes, the company hedges recorded foreign currency trade-related balance sheet positions
TOTAL PRIVATE PUBLIC <$1B PUBLIC >$1B
71%
58%
77%84%
Base: Companies with trade-related balance sheet items
Yes, the company hedges recorded foreign currency �nance-related balance sheet positions
TOTAL PRIVATE PUBLIC <$1B PUBLIC >$1B
63%
42%
50%
83%
Base: Companies with �nance-related balance sheet items
Yes, the company hedges recorded foreign currency trade- or �nance-related balance sheet positions
TOTAL PRIVATE PUBLIC <$1B PUBLIC >$1B
73%
60%
74%
88%
Base: Companies with trade- or �nance-related foreign currency balance sheet positions
Use of forwards, cross-currency swaps, and currency options
Options Total PrivatePublic
<$1 B >$1 B
Purchased options 8% 11% 0% 8%
Option collars 5% 3% 0% 7%
Participating forwards 6% 8% 5% 5%
Forward extras 3% 3% 5% 2%
Base: Companies that hedge foreign currency trade- or finance-related balance sheet items
92%
89%
85%
97%
14%
8%
15%
19%
Total
Private
Public<$1B
Public>$1B
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 25
Protect cash �ows/margins at the entity level
Protect earnings at the consolidated level by hedging transactional cash �ows
Protect both cash �ows and earnings
Other
Companies that hedge forecasted Rev or ExpLarge public �rms
13%
23%
40%
24%
16%
19%
37%
28%
< 25%
25% to < 50%
50% to < 75%
75% or more90%
88%
93%
94%
8%
5%
7%
13%
Total
Private
Public<$1B
Public>$1B
Forward contractsCross-currency swaps
All such �rms Public �rms with revenues > USD 1 B
27%
27%
42%
4%
29%
36%
33%
3%
Protect cash �ows/margins at the entity level
Protect earnings at the consolidated level by hedging transactional cash �ows
Protect both cash �ows and earnings
Other
Companies that hedge forecasted Rev or ExpLarge public �rms
13%
23%
40%
24%
16%
19%
37%
28%
< 25%
25% to < 50%
50% to < 75%
75% or more90%
88%
93%
94%
8%
5%
7%
13%
Total
Private
Public<$1B
Public>$1B
Forward contractsCross-currency swaps
62% 65%
All companies Large public �rms
All such �rms Public �rms with revenues > USD 1 B
27%
27%
42%
4%
29%
36%
33%
3%
Protect cash �ows/margins at the entity level
Protect earnings at the consolidated level by hedging transactional cash �ows
Protect both cash �ows and earnings
Other
Companies that hedge forecasted Rev or ExpLarge public �rms
90%
88%
93%
94%
8%
5%
7%
13%
Total
Private
Public<$1B
Public>$1B
Forward contractsCross-currency swaps
62% 65%
All companies Large public �rms
All such �rms Public �rms with revenues > USD 1 B
27%
27%
42%
4%
29%
36%
33%
3%
Protect cash �ows/margins at the entity level
Protect earnings at the consolidated level by hedging transactional cash �ows
Protect both cash �ows and earnings
Other
Companies that hedge forecasted Rev or ExpLarge public �rms
13%
23%
40%
24%
16%
19%
37%
28%
< 25%
25% to < 50%
50% to < 75%
75% or more
Summary: Forecasted transaction hedging, by firm ownership and sizeWhen hedging forecasted transactions, most companies hedge greater than 50% of the notional amount.
Purpose for hedging forecasted transactions
All such �rms Public �rms with revenues > USD 1 B
Hedge forecasted foreign currency transactions
All companies Large public �rms
62% 65%
Hedge instrumentsUse of forwards, cross-currency swaps, and currency options
Hedge coverage
Options Total PrivatePublic
<$1 B >$1 B
Purchased options 12% 10% 7% 16%Option collars 7% 6% 14% 9%Participating forwards 6% 8% 0% 4%Forward extras 3% 2% 0% 6%
Base: Companies that hedge forecasted foreign currency revenues or expenses
13%
23%
40%
24%
16%
19%
37%
28%
< 25%
25% to < 50%
50% to < 75%
75% or more
Hedging activity
62% 65%
All companies Large public �rms
27%
27%
42%
4%
29%
36%
33%
3%
90%
88%
93%
94%
8%
5%
7%
13%
Total
Private
Public<$1B
Public>$1B
Forward contractsCross-currency swaps
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 26
Hedging activity
Layered hedges
Rolling hedges
Annual/statichedges
OtherCompanies that hedge forecasted transactions
Large public �rms
Companies that hedge forecasted transactions
Large public �rms
Companies that hedge forecasted transactions
Large public �rms4%
0%
0%
16%
14%
31%
10%
10%
4%
34%
16%
12%
14%
3 months or less
6 months
9 months
12 months
18 months
2 years
Greater than 2 years Yes, the company elects hedge accounting
under ASC 815 (FAS 133) for hedges of forecasted transactions
0
20
40
60
80
Base: Companies that hedge forecasted foreign currency transactions
50%
36%
64%
73%
TOTAL PRIVATE PUBLIC <$1B
Systematic riskmanagement
Active hedging
Dynamichedging
PUBLIC >$1B
47%
36%
10%
70%
19%
4%
7%
Layered hedges
Rolling hedges
Annual/statichedges
OtherCompanies that hedge forecasted transactions
Large public �rms
Companies that hedge forecasted transactions
Large public �rms
Companies that hedge forecasted transactions
Large public �rms3 months
or less
6 months
9 months
12 months
18 months
2 years
Greater than 2 years
0
20
40
60
80
64%
21%
15%
60%
27%
13%
Systematic riskmanagement
Active hedging
Dynamichedging
Summary: Forecasted transaction hedging, by firm ownership and sizeWhen hedging forecasted transactions, large public companies are more likely to layer hedges, to hedge to relatively long tenors, and to designate hedges for hedge accounting.
Hedge application
Maximum hedge tenor
Yes, the company elects hedge accounting under ASC 815 (FAS 133) for hedges of forecasted transactions
TOTAL PRIVATE PUBLIC <$1B PUBLIC >$1B
50%
36%
64%
73%
Base: Companies that hedge forecasted foreign currency transactions
4%
0%
0%
16%
14%
31%
10%
10%
4%
34%
16%
12%
14%
64%
21%
15%
60%
27%
13%
47%
70%
36%
19%
10%
4%
7%
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 27
Hedging activity
Forward contracts Cross-currency swaps
Instrument usage for all hedges, by firm ownership and size Virtually all survey participants hedge with forwards. Roughly one in five firms include options in their hedging program, and one in five large public companies include cross-currency swaps.
Use of forwards and cross-currency swaps
Options Total PrivatePublic
<$1 B >$1 B
Purchased options 11% 11% 4% 13%
Option collars 7% 5% 8% 10%
Participating forwards 6% 7% 4% 6%
Forward extras 4% 3% 4% 6%
Average Rate 1% 1% 0% 2%
Base: Companies that hedge any foreign currency exposure
93%
89%
92%
98%
13%
7%
16%
21%
Total
Private
Public<$1B
Public>$1B
Survey participants
ReykjavikReykjavik
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 29
Survey participants
Private
Public
Industry Public vs. private Industry
Manufacturing 38%
Other 18%
Technology 16%
Wholesale Trade 12%
Healthcare/Pharma 5%
Finance/Insurance 4%
Energy 4%
Retail 3%
Parent company location
TotalBase: Total respondents 330
U.S. 84%
Canada 5%
Germany 2%
U.K. 2%
Austria 1%
Japan 1%
Bermuda 1%
Europe (non-Euro region) 1%
Italy 1%
Netherlands 1%
Switzerland 1%
Title at company
Total
Base: Total respondents 330
Treasurer/Assistant Treasurer 38%
Finance Manager/Cash Manager 18%
CFO 18%
Controller/Account Manager 12%
CEO/President 3%
Director of Treasury/Finance 2%
Treasury Analyst 2%
Risk Manager 2%
Treasury Manager 1%
VP/Senior VP of Finance 1%
Annual revenue
Total respondents 330
Greater than $5 billion 16%
$1 billion to $5 billion 28%
$500 million to < $1 billion 15%
$100 million to < $500 million 22%
< $100 million 19%
58% 42%
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 30
Survey participants
Yes, company hassubsidiaries inforeign jurisdictions
Europe (euro region)
Canada
U.K.
China
Mexico
Australia
Brazil
India
Europe (non-euro region)
Japan
Middle East
New Zealand
Africa
Central America
Other Asia/Paci�c Rim
Other South America
76%
71%
70%
59%
56%
54%
49%
46%
44%44%
33%
25%27%
21%42%
27%
67% 71%
52% 56%
17% 21%
45% 49%
23% 27%
74% 76%
38% 44%
65% 70%
37% 46%
60% 59%
46% 44%
49% 54%
20% 27%
41% 42%
23% 25%
23% 33%
2016 2018Base: International presence via foreign subsidiaries
208 259
Canada
Mexico
Central America
Brazil
Other South America
Europe (euro region)
Europe (non-euro region)
U.K.
India
China
Japan
Australia
New Zealand
Other Asia/Paci�c Rim
Africa
Middle East
22%
Yes, company hassubsidiaries inforeign jurisdictionsNo
78%
Private Public
66% 96% 64% 97%
34% 4% 36% 3%
Revenues<$1 B
Yes, company has subsidiaries in foreign jurisdictions
Base: Total respondents
No
Revenues>$1 B
Large and public companies are more likely to operate foreign subsidiaries. Nearly all large and public firms report having foreign subsidiaries, while only half to two-thirds of private and smaller companies have them.
Foreign subsidiaries By firm ownership and size
Base: Total respondents
Private Public Revenues<$1 B
Revenues>$1 B
Yes, company has subsidiaries in foreign jurisdictions
66% 96% 64% 97%
No 34% 4% 36% 3%
Companies appear to be enlarging the range of countries in which they have subsidiaries, with expansion into already dominant countries such as Canada, Mexico, and the U.K., as well as less common areas such as Central America, Brazil, India, and non-euro countries in Europe.
Regions where foreign subsidiaries operate
Europe (euro region) 76%
Canada 71%
U.K. 70%
China 59%Mexico 56%Australia 54%
Brazil 49%
India 46%
Europe (non-euro region) 44%
Japan 44%
Middle East 33%
New Zealand 27%
Africa 25%
Central America 21%
Other Asia/Paci�c Rim 42%
Other South America 27%
Base: International presence via foreign subsidiaries
2016 2018
208 259
Canada 67% 71%
Mexico 52% 56%
Central America 17% 21%
Brazil 45% 49%
Other South America 23% 27%
Europe (euro region) 74% 76%
Europe (non-euro region) 38% 44%
U.K. 65% 70%
India 37% 46%
China 60% 59%
Japan 46% 44%
Australia 49% 54%
New Zealand 20% 27%
Other Asia/Paci�c Rim 41% 42%
Africa 23% 25%
Middle East 23% 33%
22% No
78%
Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 31
Survey participants
0% 20% 40% 60% 80% 100%
In each geography, it is common to use the local currency as functional currency.
Local/foreign currency U.S. dollar
Europe (euro region) (n=198) 89% 11%
Canada (n=185) 79% 21%
U.K. (n=181) 90% 10%
China (n=152) 87% 13%
Mexico (n=145) 74% 26%
Australia (n=139) 88% 12%
Brazil (n=128) 86% 14%
India (n=120) 84% 16%
Europe (non-euro region) (n=115) 90% 10%
Japan (n=115) 89% 11%
Other Asia/Paci�c Rim (n=108) 78% 22%
Middle East (n=86) 74% 26%
Other South America (n=71) 79% 21%
New Zealand (n=71) 86% 14%
Africa (n=65) 85% 15%
Central America (n=54) 72% 28%
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