It pays to hedge those currency risks

British engineering companies are losing money because of the strength of sterling. German carmaker Daimler-Benz missed out on adding a chunk of money to profits because it bet against a strong dollar. And a few years back, Volkswagen lost money because it expended more energy playing the markets than making cars.

For companies whose raison d'etre is making and selling widgets, it is tough when moves in the currency market threaten to distract attention from their core business. But with shifts in the value of the dollar and the pound this year catching European companies on the hop, investors say they are wary of investing in businesses which do not bulwark profits against changes in the currency market.

"Hedging leaves companies to do what they do best," said Ingrid Burkhardt, a fund manager at Metzler Investment in Frankfurt. "They are not currency speculators."

Hedging allows companies to reduce their exposure to currency movements by locking into a fixed exchange rate for a set period of time, or by buying options that pay out a profit if a currency moves by a set amount.

Austrian textile maker Wolford, which makes 82 per cent of its sales outside Austria, is one European company that has not benefited fully from the dollar's strength. Its hedging strategy meant it missed out on a currency kicker to its 1997 profits,

which grew by 14.6 per cent to Sch190.6m ($15m).

Chief financial officer Karl Millauer reckons the strategy cost Wolford about Sch30m in missed profit.

Nevertheless, Michael Richter, an equity fund manager at Epicon Asset Management in Vienna, who owns Wolford shares, said he prefers to invest in companies that try to minimise their foreign exchange exposure, even if that means they miss out on potential gains. "Generally, it is more of a sign of intelligence when the company hedges their risks," said Mr Richter. "What is negative is when a company pursues an aggressive financial policy with no consideration to the risks."

The mark has lost more than 15 per cent of its value against the dollar this year, falling to an eight-year low of DM1.8905 last week. That should benefit German exporters, making goods cheaper in US markets and boosting the value of overseas earnings.

Daimler makes 60 per cent of its sales abroad. The company missed out on a potential 6 per cent boost to its DM1.85bn (pounds 460m) of first-half operating profit, however, as it stepped up its defences against the danger of foreign-exchange shifts eroding profit.

"I think hedging is absolutely necessary," said Manfred Gentz, Daimler's chief financial officer. "We are hedging quite a lot of positions more than we did before, because you never know when this trend will end."

Volkswagen, burnt 10 years ago when it lost DM470m after finance officials speculating in the currency market got their derivatives bets wrong, also missed out on gaining from the dollar's rise. But it is not about to change its tactics.

Not all companies are convinced of the value of hedging. Schwarz Pharma, a German pharmaceuticals company, said sales in the first-half of 1997 rose 7.6 per cent to DM632.8m. The company said DM24.5m of the DM44.7m sales increase were due to "positive currency effects". "Our major currencies are the dollar, pound and lira, but all these are strong at the moment and are still improving, so we are benefiting from these exchange rates," said Klaus Peter Langer, Schwarz Pharma's chief financial officer.

"You have to look at the other side - what would happen if the currency went the other way," said Ms Burkhardt. She was sceptical of buying shares in companies that don't hedge.

As with any form of insurance, hedging is not free. There is a cost involved in buying currency options, and if the currency market does not move against the hedging company, that is money it could have invested in its business. GKN saw currency moves bite pounds 18m off its first-half pre-tax profits of pounds 203m. Without the fluctuation, GKN's pre-tax profit would have risen by more than twice the 12 per cent it gained.

"We only hedge on aerospace and defence export contracts, which are the only export components of GKN," said chief executive, C K Chow. "Whenever we take an order, we hedge the whole programme ahead. So we protect our entire exchange exposure. We eliminate the risk."

GKN avoids currency exposure on its auto parts business by manufacturing parts in the nation where they are sold. It is building new factories in Poland, China, and Brazil to be able to supply motor manufacturers there. And, even though those overseas earnings can be affected, once they are translated into pounds, Mr Chow said they do not involve a loss of cash, undermining GKN's ability to do business, so he is not going to hedge.

With currency markets likely to remain volatile as the planned 1999 start date for the European single currency approaches, hedging is likely to play a bigger role for European companies.

"The period before the introduction of the euro is a volatile time, and it seems sensible to stick to a fairly conservative hedging policy," said David Rothblum, head of investor relations at Siemens. "You have to remember that two years ago, peoplewho did not hedge got seriously hurt," Mr Rothblum said.

Copyright: IOS & Bloomberg

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
The Doctor and Clara have their first real heart to heart since he regenerated in 'Deep Breath'
TV
Life and Style
Apple showed no sign of losing its talent for product launches with the new, slightly larger iPhone 6 making headlines
techSecurity breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
Arts and Entertainment
Jamie Oliver
filmTV chef Jamie Oliver turned down role in The Hobbit
News
The official police photograph of Dustin Diamond taken after he was arrested in Wisconsin
peopleDownfall of the TV star charged with bar stabbing
PROMOTED VIDEO
Arts and Entertainment
Jeremy Clarkson, left, and Richard Hammond upset the locals in South America
tvReview: Top Gear team flee Patagonia as Christmas special reaches its climax in the style of Butch and Sundance
News
people
Sport
Ashley Barnes of Burnley scores their second goal
footballMan City vs Burnley match report
Arts and Entertainment
Peter Mayhew as Chewbacca alongside Harrison Ford's Han Solo in 'Star Wars'
film
News
i100
Arts and Entertainment
Man of action: Christian Bale stars in Exodus: Gods and Kings
film
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
Tracy Emin's 1998 piece 'My Bed' on display at Christie's
artOne expert claims she did not
Arts and Entertainment
Catherine (Sarah Lancashire) in Happy Valley ((C) Red Productions/Ben Blackall)
TV
News
Hackers revealed Oscar-winning actress Lawrence was paid less than her male co-stars in American Hustle
people
Arts and Entertainment
Clueless? Locked-door mysteries are the ultimate manifestation of the cerebral detective story
booksAs a new collection of the genre’s best is published, its editor explains the rules of engagement
Sport
Robin van Persie is blocked by Hugo Lloris
footballTottenham vs Manchester United match report
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

Day In a Page

A timely reminder of the bloody anniversary we all forgot

A timely reminder of the bloody anniversary we all forgot

Who remembers that this week we enter the 150th anniversary year of the end of the American Civil War, asks Robert Fisk
Homeless Veterans appeal: Former soldiers pay their respects to a friend who also served

Homeless Veterans appeal

Former soldiers pay their respects to a friend who also served
Downfall of Dustin 'Screech' Diamond, the 'Saved By The Bell' star charged with bar stabbing

Scarred by the bell

The downfall of the TV star charged with bar stabbing
Why 2014 was a year of technological let-downs

Why 2014 was a year of technological let-downs

Security breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
Cuba's golf revolution: But will the revolutionary nation take 'bourgeois' game to its heart?

Will revolutionary Cuba take 'bourgeois' golf to its heart?

Fidel Castro ridiculed the game – but now investment in leisure resort projects is welcome
The Locked Room Mysteries: As a new collection of the genre’s best is published, its editor Otto Penzler explains the rules of engagement

The Locked Room Mysteries

As a new collection of the genre’s best is published, its editor explains the rules of engagement
Amy Adams on playing painter Margaret Keane in Tim Burton's Big Eyes

How I made myself Keane

Amy Adams hadn’t wanted to take the role of artist Margaret Keane, because she’d had enough of playing victims. But then she had a daughter, and saw the painter in a new light
Ed Richards: Parting view of Ofcom chief. . . we hate jokes on the disabled

Parting view of Ofcom chief... we hate jokes on the disabled

Bad language once got TV viewers irate, inciting calls to broadcasting switchboards. But now there is a worse offender, says retiring head of the media watchdog, Ed Richards
A look back at fashion in 2014: Wear in review

Wear in review

A look back at fashion in 2014
Ian Herbert: My 10 hopes for sport in 2015. Might just one of them happen?

Ian Herbert: My 10 hopes for sport in 2015

Might just one of them happen?
War with Isis: The West needs more than a White Knight

The West needs more than a White Knight

Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

'The day I was shot by the Taliban'

Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
Revealed: the best and worst airlines for delays

Revealed: the best and worst airlines for delays

Many flyers are failing to claim compensation to which they are entitled, a new survey has found
The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

The stories that defined 2014

From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

Disaster looming? Now you know where to head...

Which British city has become the first to be awarded special 'resilience' status by the UN?