A UK-listed manufacturer, renowned for its high-end products sold to supermarkets and wholesale customers, faced a significant challenge in managing its financial reporting due to the volatility of FX rates.

Background

The company operates globally, with distribution centres in Europe, the US, Asia, and Australia, which means its assets and operations are spread across various currencies. However, the company reports its financials in British pounds to its shareholders in the UK. While the business was expanding and performing well internationally, the constant fluctuations in exchange rates created a recurring problem: the value of its international assets, such as real estate, stock, and cash, would vary in GBP terms. ​

​At the end of the financial year, the company faced the dilemma of translating the value of these assets into GBP, leading to substantial discrepancies in the company’s reported balance sheet figures.

Challenge

One year, the company reported a seven-figure loss on its balance sheet, largely driven by the fluctuating value of its foreign assets due to the volatility in currency exchange rates.

For shareholders, the reported loss seemed alarming and gave the impression that the company’s assets were shrinking in value. However, the loss was not a reflection of the company’s performance or asset depreciation, but simply the result of currency fluctuations, distorting the company’s overall financial performance.

Solution

To eliminate the volatility that was affecting the clarity of their financial reports, the company implemented a hedging strategy designed to protect the balance sheet from the fluctuations of exchange rates. The strategy was built around a quarterly balance sheet hedge aimed at stabilising the currency impact throughout the year.​

​Each quarter, the company would reassess the value of its international assets in GBP terms and determine the appropriate level to hedge for the coming quarter. The company would then enter into FX swaps for each quarter. ​

​These currency swap agreements were tailored to the value of the assets and designed to offset the impact of FX fluctuations by locking in exchange rates. ​

This bespoke hedging solution would effectively “flatline” the currency volatility, ensuring the company’s reported balance sheet remained consistent from quarter to quarter.​

​This dynamic hedging strategy allowed the company to significantly reduce the effects of currency volatility on its balance sheet and ensure more predictable and stable financial reporting.

Outcome

​By using tailored hedges for each quarter, there were no longer unexpected drops in asset values or sudden losses appearing on the balance sheet. Shareholders no longer saw large swings in reported asset values, and the company’s financial reports became more reliable.​

For the manufacturer, the outcome was a predictable, consistent reporting cycle that aligned with the true performance and value of the business. The hedging strategy not only protected the company’s balance sheet but also ensured greater transparency, confidence, and trust with its investors.

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