Bayer Group's two-year plan pays off

But one major multi-national is benefiting from changes it made to its currency risk management two years ago, when such dollar weakness was unthinkable.

At a time when the euro was trading at 86 cents (January 31, 2002) pharmaceuticals and chemical conglomerate Bayer Group began reducing its US dollar dependency. It tried to reduce currency exposure on a net basis by expanding local production and by changing underlying procurement or sales contracts, explained Christian Held, group treasurer at Bayer's headquarters in Leverkusen in Germany.

The firm also endeavoured to manage indirect currency risk – for example risk incurred in energy purchases. "We included the currency component of all petrochemical or energy purchases contracted in euros to the extent that they go with the US dollar in our net exposure," he said, in a recent interview with FX Week sister publication Risk magazine.

Bayer manages the remaining currency risk, and its risk tolerance is both a function of the absolute level of the currency pair in question as well as the group's operating performance. "Here we adapt the hedging of future cashflows or planned sales according to the risk levels senior management is willing to bear, which in turn is dependent on the view of the market participants and ourselves on the particular currency," said Held.

Held said Bayer rolled out or increased a number of its currency hedges in expectation of the US dollar weakening versus the euro. Those precautions left it relatively unscathed compared with other European corporates who had not anticipated the scale of the dollar drop.

For currency hedging, Bayer opts for plain vanilla structures, options and forwards, but only uses exotics on a limited basis because of accounting implications.

Underlying Bayer's risk management programmes is sensitivity analysis – a tool that provides managers with an easy-to-understand risk exposure estimate – and the measurement of value-at-risk. Held said it does this differently to other corporates: "You need to differentiate from a VAR that is only comprised of hedging contracts. You will most often find in other companies' 20Fs (SEC filings) that they base VAR only on hedges. We combine the underlying cashflows plus the hedges and derive the VAR from there."