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BABC member HSBC releases article on Market Risk Management: What treasurers need to consider during

Corporate treasurers considering COVID-19 hedging strategies are facing a complex set of challenges.

There is no bigger focus for corporate treasurers these days than managing the impact of COVID-19 on their organization. And while cash is likely to be king for most companies currently, both their current hedge book and future strategy to manage market risks have risen in importance as well, explains Holger Zeuner, Head of Thought Leadership EMEA within HSBC’s Global Markets Corporate Sales team.

What makes hedging so difficult in the current environment?

There are four factors coming together on this: first, the economic outlook for businesses has become highly uncertain, making the volumes and maturities of hedges that we saw before the pandemic less applicable in today’s climate. Second, market volatility has come back with a vengeance to many currency pairs, commodity prices and interest rates. Third, with remote working as the status quo for most corporate treasurers, there is a potential increase in operational risk in executing the chosen strategy while being away from the usual office set-up. And finally, this has been met by reduced market liquidity.

“All of these factors taken together significantly complicate corporate decision-making,” according to Zeuner. Higher volatility indicates an increased risk environment (particularly when measured against traditional risk measures such as value-at-risk or historic scenarios) – usually indicating a requirement to hedge more. When this meets a reduced certainty on underlying cash flows, 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 liquidity.

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