Commodity, Interest Rate and FX risk management advice (“Hedging Advisory”)

Almost all businesses are confronted with managing one or more of currency exchange, interest rate or commodity risks. If you are reliant on debt to finance your business then, unless you are fortunate enough to have a solid credit rating, you will find that your lenders are insistent on you putting in place active measures to manage these risks – hedging programs. This is understandable, from a creditor’s perspective. However, when the creditor is a bank, there is an added dimension. The bank will expect to be the counterparty that assists you in managing the risks. And therein lies a conflict. Because currency, interest rate and commodity hedging are very profitable business lines for banks. They are especially profitable, largely because they are opaque, at least to all but the most sophisticated corporate treasuries. To make matters worse, in transacting hedging solutions, banks do not owe their customers a duty of care, according to the United Kingdom’s courts, at least.

Unfortunately, in among the myriad aspects of financing transactions or projects, the currency exchange, interest rate or commodity risks are typically considered to be something of a sideshow (not, however, by the hedging banks, for whom a potential bonanza may be in the offing). It is a niche subject, unfamiliar to most borrowers and typically, to their financial advisers, who typically have had very limited exposure to FX, interest rate or commodity trading. Yet, commitment to an inappropriate hedging program presents a fat greater risk to your business than, for example, a sub-optimal borrowing cost. There are plenty of examples of otherwise sound businesses that have perished due to liabilities that have exploded because of inappropriate hedging programs.

If this may be relevant to your transaction or project, then appointing an adviser to assist you in the design of an appropriate hedging policy; to offer guidance to your board through its implementation and to negotiate its approval by your lenders should be considered a necessity. Caseyare Consulting’s Kevin Ryder has witnessed some of unfortunate situations where this subject has been neglected from close range. He has many years of experience in the field of financial derivatives and designing of policies to manage FX, interest rate and commodity price risk and is well placed to assist you to achieve the right risk management solution for your transaction or project.