Profit Repatriation Strategies

Exchange Rate Forecasting & J Curve

International Cash Management

In the area of foreign exchange risk management, there are good arguments both for and against
centralization. Favoring centralization is the reasonable assumption that local treasurers want to
optimize their own financial and exposure positions, regardless of the overall corporate situation. An
example is a multibillion-dollar US consumer goods firm that gives its affiliates a free hand in
deciding on their hedging policies. The firm’s local treasurers ignored the possibilities available to the
corporation to trade off positive and negative currency exposure positions by consolidating exposure
worldwide. If subsidiary A sells to subsidiary B in sterling, then from the corporate perspective, these
sterling exposures net out on a consolidated translation basis (but only before tax). If A and/or B
hedge their sterling positions, however, unnecessary hedging takes place or a zero sterling exposure
turns into a positive or negative position. Furthermore, in their dealings with external customers, some
affiliates may wind up with a positive exposure and others with a negative exposure in the same
currency. Through lack of knowledge or incentive, individual subsidiaries may undertake hedging
actions that increase rather than decrease overall corporate exposure in a given currency.
A further benefit of centralized exposure management is the ability to take advantage, through
exposure netting. Thus, centralization of exchange risk management should reduce the amount of
hedging required to achieve a given level of safety.
Once the company has decided on the maximum currency exposure it is willing to tolerate, it can then
select the cheapest option(s) worldwide to hedge its remaining exposure. Tax effects can be crucial at
this stage, both in computing the amounts to hedge and the costs involved, but only headquarters will
have the required global perspective. Centralized management is also needed to take advantage of the
before-tax hedging cost variations that are likely to exist among subsidiaries because of market
imperfections.
All these arguments for centralization of currency risk management are powerful. Against the benefits
must be weighted the loss of local knowledge and the lack of incentive for local managers to take
advantage of particular situations that only they may be familiar with. Companies that decentralize the
hedging decision may allow local units to manage their own exposures by engaging in forward
contracts with a central unit at negotiated rates. The central unit, in turn, may not lay off these
contracts in the marketplace.
Portfolio Balance Approach
Exchange Rate Forecasting Models
International Debt Market Instruments
ECGC
International Machines Inc.,