This is the Time to Be Cautious…

The European Union’s initiation of quantitative easing (QE) raises concerns about the state of Europe’s economies, and Japan has just released lower than expected GDP growth associated with its “Abenomics” program. These macroeconomic indicators should signal a review of your existing hedge notionals.

A typical corporate hedge strategy is to layer on hedges over time. This allows companies to hedge a higher percentage of their risk as they get closer to the transaction date and their confidence in the numbers increases. Hedge Trackers is encouraging clients to review the potential impact of significant weakening in the global forecasts. At the very moment when many clients want to hedge more against the ever strengthening dollar, we suggest you re-evaluate the “probability” of your European/Japanese/other forecasts and consider lowering your forecast confidence, perhaps in advance of the marketing/sales/FP&A department.

Whether hedging revenues or expenses, substantial volume changes can disrupt your hedge strategy and hedge performance. A poor or changing forecast (such as a reduction in force or lower sales) can result in over-hedging which may be problematic is several ways: first, creating economic (cash) risk with a derivative position and then jeopardizing the company’s ability to utilize hedge accounting into the future. For those companies hedging a portion of revenue as a proxy for hedging net earnings this is an important time to consider the purpose of the hedge program and track risks to net earnings, not just revenue.