Money Measures Matter: Thomson Reuters
When Thomson Corp. acquired Reuters in 2008 to cre- ate Thomson Reuters, the merged entity’s much larger
geographic footprint dramatically increased
its foreign exchange exposure. Measuring the
cash flow risk and economic volatility of its
global FX exposures was a daunting task put
before the treasury organization.
Roughly 30% of Thomson Reuters’ $13 billion in annual revenues and about 35% of
expenses and capital expenditures were in currencies other than the U.S. dollar, driving significant cash flow risk. The largest mismatch
was its meaningful euro revenues and large
sterling cost base, which resulted in about
$800 million long euro and $600 million short
sterling cash flow exposures a year.
Added up, the potential annual cash flow
risk related to the company’s top eight exposures, considered individually, was more than
$350 million. “We needed to roll up our sleeves
to understand the FX exposures, build a model
to measure the impact on our business, and
then develop an effective FX hedging program
to reduce economic FX risks,” says David
Shaw, treasurer and senior vice president of
the New York-based information provider.
Treasury tackled the challenge by build-
ing a portfolio risk model that measures
Value-at-Risk (VAR) from its FX operating
exposures, taking into account the directions
and magnitudes of the exposures, as well as
currency correlations. “We found out that the
diversification benefits generated by offsetting
exposures significantly reduced our economic
risk,” Shaw explains. “For example, the worst-
case annual cash flow impact related to the top
eight non-U.S. dollar operational exposure cur-
rencies considered individually was reduced
by about 65%, from more than $350 million to
about $125 million.”
Treasury also worked closely with global
business teams to improve the company’s FX
experience by developing more specific pric-
ing policies for both customers and vendors.
This, too, is paying off. Shaw notes that senior
management had previously been explor-
ing a move to global U.S. dollar pricing for a
significant portion of business to reduce FX
exposure.
“We were able to determine that such a
move would actually exacerbate the imbalance
in our FX footprint and increase our global
margin and cash flow risk due to FX,” he says.
That plan was abandoned for what Shaw calls
“more beneficial actions.”
The new FX hedging program leverages the
portfolio risk model to assess the potential
impact of various hedging approaches on
both cash flow and earnings. “We determined
that by hedging our three largest currencies at
50%, we could further reduce our annual cash
flow risk by about 50%, and also reduce our
current FX-related profit and loss volatility,”
says Michelle Scheer, vice president and assistant treasurer.
With regard to the latter, Scheer explains
that the derivative mark-to-market would
offset the FX volatility currently recorded in
the P&L. “We thus implemented a corporate
hedge program that we expect to significantly
reduce our economic FX risk in an accounting-friendly way,” she says.
The FX hedge program has been back-tested, and had it been implemented in the
past, annual average volatility would have
been reduced significantly, Shaw says.
“Employees across the organization
are now more engaged in the efforts of
managing FX risk,” he adds. “The operating divisions take greater ownership of
their global exposure forecast and seek
treasury’s advice on the FX impact of their
potential commercial policy initiatives.
All of this allows us to be very calm as the
macroeconomic environment changes. No
matter what is thrown at us, the models and
initiatives have made us very comfortable
ALEXANDER HAMILTON BEST PRACTICES: FINANCIAL RISK MANAGEMENT
Clockwise from front, David shaw, treasurer and svP; vishal Parekh,
manager, treasury and capital; Holly Flores, director, treasury and capital;
andrew Perrin, vP treasury, global head of pensions and investments; and
michelle scheer, vP and assistant treasurer
Photo by Donnelly Marks
