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Multinationals Scramble To Contain Risks Linked to Brexit

Multinationals are moving to protect against foreign exchange risk and other repercussions of Britain’s decision to leave the European Union, said Anthony Carfang, managing director of consulting firm Novantas Inc.’s Treasury Strategies Inc. division.

Specifically, finance chiefs and treasurers are increasing their currency hedges, raising cash holdings and more closely scrutinizing the credit quality of their trade partners, he said.

“We’re all expecting a volatile ride,” Mr. Carfang said. “Clients are avoiding exposure. They are upping the amount of hedges.”

Companies are hedging the foreign currency risk of both their balance sheets and income statements, he said. Firms typically pay a fee to lock in an exchange rate for a future date to offset the possibility  that currency markets move in an unfavorable direction.

Those that would typically hedge 60% of their foreign exchange exposure, for example, are increasing that to 80%, Mr. Carfang said, adding that the costs of such hedging stands as an impediment.

“To hedge 100% is pretty expensive,” he said.

“They are going to be hedging transactional items that are coming due in two years,” Mr. Carfang said. They might hedge their exposure to term loans that will be repaid during that time, he said.

Companies are also increasing their cash positions, as they weigh the possible impact of the Brexit on the banks with which they have relationships. Generally speaking , Mr. Carfang expects companies to increase their cash holdings by 10%.

“They want to raise their cash to be less dependent on banks,” he said.

Read the full article on The Wall Street Journal…

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