New book: Avoid forecasting exchange rates

“It’s like looking at a crystal ball – with a little luck your prediction will be correct. Maybe once, maybe twice. You’ll make a mistake in the long run and it could have disastrous consequences for your company,” says Lars Oxelheim, emeritus professor of business administration at Lund University. School of Economics and Management and one of the authors of the book Corporate Foreign Exchange Risk Management.

Together with the other authors of the book, Håkans Jankensgård, associate professor of business administration and CEO Alfa Alviniussen, Lars Oxelheim wants to reach out to those who meet and manage exchange rates in their work. This is because there are more value-creating aspects to focus on in foreign exchange risk management than it is necessary to anticipate future fluctuations.

“With this book, we want to try to reach professionals in both small and medium-sized companies in Sweden and globally. It quickly becomes complicated when working on foreign exchange and consequently the need for control arises,” says Håkan Jankensgård and continues:

“Just look at how it is today. We are seeing large exchange rate fluctuations and this is turbulence that in itself shows that it is not possible to make forecasts. Who calculated that a new coronavirus would appear and turn everything around? No one. However, there are other ways to do it. control and that’s what we want to show. ”

Focus on understanding risk exposure

The book is clearly divided into ten teaching chapters covering various factors in foreign exchange risk management. It begins by studying why companies need to manage the risks caused by foreign currency risk exposure, continues through balance sheets, derivatives and hedge accounting to the importance of centralizing foreign exchange control, integrated risk management and communication.

“Risk management should consist primarily of understanding your risk exposure and what happens when different exchange rates change. What are the possible impacts on the company? How will this affect the company’s financial position? Will we be able to achieve important goals? However, we know that a lot of people don’t work this way.Instead, people in companies have different tools to outperform the market.This is an activity that is considered completely natural and unquestioned.However, the problem is that research shows it doesn’t generate surplus Therefore, it is a waste of company resources and there are often surprises, as the company’s vulnerability is not fully targeted, “says Håkan Jankensgård.

If the authors sent four key messages to managers, controllers, and others, they would be as follows:

It is not possible to successfully predict or predict exchange rates.

Instead, focus on understanding risk exposures at different levels of financial performance and how they relate.

Develop foreign exchange strategies in a strategic context that helps the company achieve important goals.

Companies need to better communicate risk management in their accounts.

Is this controversial? Yes and no, say Lars and Håkan. It depends, perhaps, on who you ask.

“There is, of course, an entire sector that we are undermining with this book. Bank economists are complacently predicting dollar exchange rates to decimals, but that is pure luck all the time. There is no evidence that you can beat the market,” says Lars Oxelheim.

“We think it would be wiser to redistribute energy and instead focus some of the energy devoted to forecasting in trying to beat the market on developing in-depth knowledge of your risk exposure and building a model to make decisions based on it. This is important to take seriously. the key financial ratio of the company and how well the company manages to implement its business plan. “

Why do people work this way if it doesn’t work?

“It’s human nature. Hubris and optimism are well-documented traits. It all influences decision-making, not just in companies. Besides, it’s common for people to hide failure somewhere. And that’s why, instead, we interpret everything in a positive light and believe me that we will succeed next time, ”says Håkan Jankensgård.

Use a strategic long-term approach

Håkan Jankensgård and Lars Oxelheim believe that there is currently too much focus on foreign exchange risk management on direct transactions.

“It’s human nature to focus on what can be checked now and what’s happening, because it’s something you can see and almost touch. However, a strategic approach would be to look at the long term, like a year in advance, and try to understand how foreign exchange impacts can disrupt the value creation process, ”says Håkan Jankensgård.

In addition, Lars Oxelheim and Håkan Jankensgård believe that companies as a whole fail to communicate through their financial statements.

“Many reports are in principle completely incomprehensible and it is difficult to understand how foreign exchange risk management relates to operating profit or loss of a company. Consider how analysts feel when they need to interpret them. They find it complex and perhaps a bit threatening – derivatives are, of course , associated with many accidents. There is a risk that people will start questioning the company and its activities when there is something that is not understood, ”says Håkan Jankensgård.

Instead, he would like to see financial statements that are not only prepared in accordance with accounting regulations, but also contain a clearer narrative, focusing on how and why foreign exchange controls help a company achieve its goals. With this approach, reports can actually help a company increase confidence and reduce capital costs.

With the new book, the authors want to show that there is a “golden mean” based on academic models that emphasize the principles of optimal risk management, but which are adapted to the reality of practitioners and the need to integrate foreign exchange risk management into overall financial management.

Co-author Alf Alviniussen has 42 years of practical experience since the creation and improvement of the finance department and risk management at Norsk Hydro. It has witnessed the benefits of integrated risk management and the improved decision-making basis it provides.


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