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The Foreign Exchange Market Is Capricious &Nbsp; European Enterprises Are Struggling To Cope.

2011/8/22 10:12:00 47

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Foreign Exchange Market: European Enterprises

From economic recovery to sovereignty

debt

At present, there are many worries about European enterprises.

This is not enough, and the exchange rate problem also follows chaos.

Affected by the depreciation of the US dollar and the euro, whether mining giants or Swiss watch makers are looking at the erosion of corporate profits, they are having a hard time.

In desperation, some enterprises have begun to rethink about where the operation base should be.

foreign exchange

The problems can not be underestimated, but the ways of coping are different.

Take mineral company Rio Tinto, RIO.AU (RIO), Xstrata (XTA.LN) and British and American resources group (Anglo American) as an example. Due to the substantial appreciation of the Australian dollar and other currencies, the impact of the exchange rate on the profits of the three companies in the first half of the year amounted to US $2 billion 100 million, equivalent to 16% of the total profits.

However, these companies did not take hedging measures on foreign exchange exposure, because the rise in commodity prices can often offset the negative impact of currency appreciation in the country where the mining base is located.

In addition, these companies are also worried that they can not grasp the discretion of hedging, because even if hedging is appropriate, it will not necessarily have much benefit, and if there is a mistake, there are consequences that need to be borne.

The problems faced by other industries are even more pressing.

For example, the income of Swiss multinationals is mostly in dollars or euros, but the cost of production is calculated in Swiss francs.

Because of the strong rise in the Swiss Franc this year, Swatch, Swatch (SWGAY), is worried that if we want to achieve the target of 7 billion Swiss francs, we will have to deal with the 1 billion Swiss Franc (US $1 billion 260 million) impact caused by the exchange factor first.

Nestle SA, the food giant, predicts that the profit in the first half of the year will increase by 5.2% compared with the same period last year, but if it is converted into Swiss francs, the profit will drop by 8.5%.

It is not easy to find the right strategy to deal with simple exchange rate fluctuations.

Enterprises can certainly hedge future exchange rate fluctuations through derivatives, so as to ensure that profits are not eroded by exchange factors, but the scale of hedging is not easy to grasp. Especially when the economic situation is uncertain, it is difficult for enterprises to make accurate predictions of their own level of profitability.

What's more, because the relevant accounting standards require enterprises to reflect changes in the market value of derivatives used in hedging in profit statements, the fluctuation of corporate profits will increase.

Corporate finance personnel are increasingly inclined to hedge exchange rate fluctuations through foreign exchange options.

According to Bank of England, foreign exchange options traded by non-financial companies accounted for 22% of the daily average foreign exchange pactions in London in the six months ended April, compared with 11% in the previous six months.

However, hedging through foreign currency options is unavoidable to pay expensive front-end commissions to banks.

Moreover, in order to reduce the risk of exchange, it is better for a company to make long-term plans.

Lonza Group (LONN.VX) and Clariant (CLN.VX, CLZNY) and other Swiss chemical enterprises are considering moving their production bases abroad, so that their income and cost will not be affected because of the large deviation of exchange factors.

EADS EAD.FR (EADSY) also said it would seek acquisition opportunities in the US in order to ease production costs in euros, but in dollar terms, EAD.FR said.

Sale

The problem of income.

In view of the increasingly uncertain foreign exchange market, some European enterprises have begun to take action.