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London

Wells Fargo Foreign Exchange

2018 Risk Management Practices Survey

Wells Fargo Foreign Exchange 2018 Risk Management Practices Survey 2

2018 Risk Management Practices Survey

Shanghai

Wells Fargo Foreign Exchange is pleased to present our sixth biennial survey on FX risk management practices. We sincerely offer our thanks to the 330 clients who took the time to provide information necessary to create this survey and hope this latest edition continues to bring insight on establishing proper policies and procedures for managing currency risk in an increasingly global economy.

Since our last survey, we have experienced some truly unexpected political events (Brexit and the U.S. elections), as well as a shifting global interest rate environment. With this backdrop, we present the findings of our 2018 Foreign Exchange Risk Management Survey.

Survey participant composition

Annual revenue

Total respondents 330

Greater than $5 billion 16%

$1 billion to $5 billion 28%

$500 million to < $1 billion 15%

$100 million to < $500 million 22%

< $100 million 19%

Public vs. private Industry

Manufacturing 38%

Other 18%

Technology 16%

Wholesale Trade 12%

Healthcare/Pharma 5%

Finance/Insurance 4%

Energy 4%

Retail 3%

Private

Public 58% 42%Private

Public

CFO

84%

5%

2%

2%

1%

1%

1%

1%

1%

1%

Total

Base: Total respondents 330

Treasurer/Assistant Treasurer

Finance Manager/Cash Manager

CEO/President

Director of Treasury/Finance

Treasury Analyst

Risk Manager

Treasury Manager

VP/Senior VP of Finance

Controller/Account Manager

38%

16%

12%

4%

5%

4%

3%

Manufacturing

Technology

Wholesale Trade

Finance/Insurance

Healthcare/Pharma

Energy

Retail

Industry

19%

22%

15%

28%

16%

Total


< $100 million

$100 million to < $500 million

$500 million to < $1 billion

$1 billion to $5 billion

Greater than $5 billion

84%

5%

2%

2%

1%

1%

1%

1%

1%

1%

1%

TotalBase: Total respondents 330

U.S.

Canada

Germany

U.K.

Austria

Japan

Bermuda

Europe

Italy

Netherlands

Switzerland

Private

Public58% 42%

CFO

38%

18%

18%

12%

3%

2%

2%

2%

1%

1%

Total




CEO/President


Treasury Analyst

Risk Manager

Treasury Manager



Industry


28%

15%

22%

19%


< $100 million

$100 million to < $500 million

$500 million to < $1 billion

$1 billion to $5 billion

84%

5%

2%

2%

1%

1%

1%

1%

1%

1%

1%


U.S.

Canada

Germany

U.K.

Austria

Japan

Bermuda

Europe (non-Euro region)

Italy

Netherlands

Switzerland

Private

Public58% 42%

CFO

38%

18%

18%

12%

3%

2%

2%

2%

1%

1%

Total




CEO/President


Treasury Analyst

Risk Manager

Treasury Manager



Industry

84%

5%

2%

2%

1%

1%

1%

1%

1%

1%

1%


U.S.

Canada

Germany

U.K.

Austria

Japan

Bermuda

Europe (non-Euro region)

Italy

Netherlands

Switzerland

38%

18%

12%

5%

4%

4%

3%

Manufacturing

Other

Wholesale Trade

Healthcare/Pharma

Finance/Insurance

Energy

Retail

16%Technology


Executive summaryOnce again, we have polled a wide spectrum of companies across geographies and industries, of varying size, and both public and private. The information contained in these pages details how these companies evaluate FX risk, the types of exposures they hedge, how they think about budgeting, accounting, and a host of other issues.

Concern regarding FX risksOver the last several years as evidenced by our last three surveys, we have consistently seen more clients viewing FX as a greater concern than a lesser one. However, it is interesting to note that the level of concern seems to correspond to the value of the U.S. dollar. When the dollar weakened (as in the 2014 survey and the current 2018 survey), a small proportion of clients experienced greater concern. However, in 2016, when the dollar strengthened, concern was very elevated. This may indicate that more companies suffer when the dollar strengthens (as net exporters would) than when the dollar weakens.

Best practicesWe saw upticks in the use of quantitative analysis, the setting of budget rates for planning purposes, the updating of FX policies, and the minimum thresholds for counterparty creditworthiness. We would consider all of these “best practices,” as these traits were much more evident in large public companies, which tend to require heavier focus on, and investment in, managing FX-related issues.

Hedge instrumentsCompanies predominately use forwards to hedge all types of FX risk. But depending on the specific exposure, we see some variation. For example, companies are twice as likely to use cross-currency swaps to hedge balance sheet exposure related to financing versus balance sheet exposure related to trade. Furthermore, 20% of clients use some sort of option structure for hedging, with relatively more using options to hedge forecasted exposures than for balance sheet items.

Concern regarding FX risks

Attitude toward FX risk management

Best practices

Policy includes a minimum credit rating for counterparties

2016

60%

2018

67%

Use quantitative or statistical methodology to measure risk

2016 2018

17% 23%

Hedging activities

Companies that hedge at least one type of exposure

Total Large public companies

84%93%

Hedge instruments

67%

26%7%

2018

Greater concern Unchanged Reduced concern

2016

55%

38%

7%

2014

30%

2%

67%

93%13%

6%

20%3%

Forward contracts Cross-currency swaps Options Local currency debt Other

Perceptions and processes

Seoul


752014 2015 2016 2017

80

85

90

95

100

105

At the time of our previous (2015 – 2016) risk management survey, currency market conditions were highlighted by an upward trending USD, which presented headwinds to U.S. exporters, and relatively elevated currency volatilities.

The environment at the time of the present survey, by contrast, was arguably less challenging, with the USD experiencing a period of consolidation after weakening during the first half of 2017 and currency volatilities remaining relatively subdued.

USD (DXY Index) Implied currency volatilities (3m, ATMF)

Source (for USD and Implied currency volatilities charts): Wells Fargo estimates based on data from Bloomberg as of January 14, 2018

Given the generally more benign market environment, it comes as little surprise that a greater percentage of participants in the present survey indicate no change in their attitude toward FX risk management during the 12 months prior to the survey and a relatively smaller percentage indicate increased concerns.

Attitude toward FX risk management

USD/CAD

0

5

10

15

20

2014 2015 2016 2017

EUR/USDGBP/USD


Greater concern Unchanged Reduced concern

Base: Total respondents = 287

67%

26%7%

20182016

55%

38%

7%

2014

30%

2%

67%





Of the firms indicating increased concerns for FX risk management, adjusting hedge strategies (e.g., increasing the amounts of exposures hedged, lengthening the average maturities of hedges, and adjusting the mix of instruments) remains a focus, but these firms are also assigning priority to strengthening their risk management infrastructure (e.g., revising their FX policies and investing in systems).

Changes made to risk management

Base: Companies that view FX risk management as a greater concern2016: 159 • 2018: 85

London

Increased the amount of exposure that is hedged

Developed/revised an FX policy

System improvements/enhancements

Extended the average maturity of your hedges

Altered the mix of hedging instruments used

Decreased the amount of exposure that is hedged

Shortened the average maturity of your hedges

None yet

Other

0 10 20 30 40 50

47%35%

28%27%

26%29%

18%13%

9%13%

7%

3%5%

22%

23%8%

*No data for 2016

2016

2018

64% 66%

Yes, the company has a formal written policy for managing foreign exchange risk



2016 2018

Base: Companies that have a formal written policy2016: 184 • 2018: 216

Annually Semi-annually

Quarterly Other

78%75%

4%1%6%4%

17% 16%

2016

2018









None yet

Other

0 10 20 30 40 50

47%35%

28%27%

26%29%

18%13%

9%13%

7%

3%5%

22%

23%8%

*No data for 2016

2016

2018



Quarterly Other

78%75%

4%1%6%4%

17% 16%

2016

2018










None yet

Other

0 10 20 30 40 50

47%35%

28%27%

26%29%

18%13%

9%13%

7%

3%5%

22%

23%8%

*No data for 2016

2016

2018

64% 66%




2016 2018


FX risk management infrastructure

The focus on enhancing FX risk management infrastructure is evidenced by upticks in number of firms having an FX policy, the frequency of policy reviews, and the increasing percentage of respondents quantifying exposure to FX risk.

Have a formal written policy?


2016 2018

64%


66%


Use quantitative or statistical methodology to measure risk

Yes, the company employs a quantitative or statistical methodology to measure foreign currency risks to financial performance

2016 2018

17%


23%


Policy includes a minimum credit rating for counterparties

Yes, the company’s risk management policy specifies a minimum acceptable credit rating for counterparties

2016 60%

2018 67%

Base: Companies that have a formal written policy 2016: 184 • 2018: 216

Frequency of policy review or update



Quarterly Other

78%75%

4%1%6%4%

17% 16%

2016

2018



With relatively broader global footprints and facing more intense public scrutiny, large public companies (revenues greater than USD 1 B) are most likely to employ rigorous risk management policies and procedures that arguably may be characterized as best practices.


TOTAL PRIVATE PUBLIC <$1B PUBLIC >$1B

66%

48%

78%

93%

Base: Total respondents

Yes, the company's risk management policy speci�es a minimum acceptable credit rating for counterparties


67%

48%

80% 80%

Base: Companies that have a formal written policy

Yes, the company employs a quantitative or statistical methodology to measure foreign currency risks to �nancial performance


23%12% 22%

42%


Sydney

Base: Companies that have a formal written policy

Frequency of policy review

Total

75%Annually

Private

73%Annually

Public< $1 B

72%Annually

Public> $1 B

78%Annually



Yes, the company sets budget rates for planning purposes

No

0

20

40

60

80

Base: Total respondents = 265 0 20 40 60 80 100 120

TOTAL

PRIVATE

PUBLIC <$1 B

77%

71%

93%

81%PUBLIC >$1 B

Base: Companies that set budget rates for planning purposes = 265


Variance reporting only

0

20

40

60

8080%

72%

84%

94%

TOTAL PRIVATE


TOTAL

PRIVATE

PUBLIC <$1 B

77%

71%

93%

81%PUBLIC >$1 B


PUBLIC <$1B PUBLIC >$1B


0

20

40

60

8080%

72%

84%

94%

TOTAL PRIVATE


TOTAL

PRIVATE

PUBLIC <$1 B

77%

71%

93%

81%PUBLIC >$1 B

Base: Companies that set budget rates for planning purposes = 265PUBLIC <$1B PUBLIC >$1B


A majority of participants continue to set budget rates for planning purposes, with large public firms nearly universal in this practice. When setting budget rates, companies often rely on consensus forecasts, a practice that tends to be most common among firms that do incorporate budget rates in hedging decisions.

FX budget rates



80%

72%

84%

94%

Risk management role of budget rates

Total PrivatePublic

<$1 B >$1 B

None, only use budgetrates for variance reporting 77% 71% 93% 81%

Impact choice of hedging instruments 14% 19% 4% 10%

Do not hedge if current rates are worse than budget rates 8% 11% 4% 5%

Other 3% 2% 0% 5%

Base: Companies that set budget rates for planning purposes = 265

The following factor(s) are used in setting budget rates

Consensus forecasted rates 47%

Prevailing spot rates 37%

Prevailing forward rates 27%

Historical average rates 17%

Blend of existing hedge rates 14%

Other 5%

20%

80%

Even companies that price in USD are subject to foreign exchange risk. Of foreign transactions that are denominated in USD, two of three such prices are adjusted periodically to reflect changes in exchange rates.

Are USD prices adjusted in response to FX changes?

Base: Prices set in USD

Hong Kong

14% 13%

41%

32%

38%

13%

33%

16%

10%

38%

17%

35%

16%

6%

48%

30%



0

10

20

30

40

50

ALL PRIVATE PUBLIC <$1 B PUBLIC >$1 B

Revenues only Vendor costs/expenses only Both are adjusted Neither are adjusted


U.S. more attractive relative to foreign countries

Made business in the U.S. and in foreign

countries less attractive

Had no impact on operations in the U.S. or

in foreign countries

All participants

Large public �rms


Made business in foreigncountries more attractive

relative to the U.S.

Made business in the

0

5

10

15

20

25

30

35

41%

21%

39% 38%

34%

48%

ALL PRIVATE PUBLIC <$1 B PUBLIC >$1 B

U.S. Non-U.S.


Business effects of regulatory changes during the past two years

More than1/3of the large public companies participating in the survey indicate that U.S. or foreign regulations have either made hedging more difficult or affected trading negatively. Small public firms and private companies appear less affected by regulatory changes.

Percent reporting negative effects from U.S. and non-U.S. regulations on FX risk management during the past two years

4%

4%3%

9%14%

84%80%

11%8%

12%

28%

16%19%

17%

31%

For public firms, the accuracy and timeliness of data has become the greatest FX risk management challenge.Private firms participating in the survey report that market volatility, when to hedge, and using a proper strategy remain the greatest challenges.

Greatest FX risk management challenge: 2018

By private/public

2016Private Public

Market volatility, when to hedge, and the proper strategy63% 37%

Accuracy and timeliness of data13% 33%

Approvals, communications, and internal resources13% 11%

Hedge accounting and compliance7% 16%

Other4% 4%

2018Private Public

Market volatility, when to hedge, and the proper strategy55% 28%

Accuracy and timeliness of data21% 47%

Approvals, communications, and internal resources13% 9%

Hedge accounting and compliance5% 13%

Other6% 4%


43%

32%11%

8%

6%



Market volatility, when to hedge, and using a proper strategy

Accuracy and timeliness of data

Approvals, communications, andinternal resources

Hedge accounting and compliance

Other

Hedging activity

MadridMadrid


Hedging activity

Hedge recorded foreign currency trade-related balance sheet items*

Hedge recorded foreign currency finance-related balance sheet items**

Hedge forecasted foreign currency revenues or expenses***

Hedge without benefit of hedge accounting to offset the potential negative impacts of FX earnings translation risks**** Hedge equity net investments in (positive net

worth of ) subsidiaries****

Base: *Respondents with trade-related balance sheet items**Respondents with finance-related balance sheet items ***All respondents ****Respondents with local/foreign currency functional subsidiaries

Hedge practices

0 20 40 60 80 0 20 40 60 80 0 20 40 60 80 0 20 40 60 80

Forward contracts

Cross-currency swaps

Options — breakdown below

Other

Hedge instruments

Known, recorded balance sheet items and forecasted foreign currency transactions remain the exposures most commonly hedged by survey participants. Net investment and foreign earnings translation exposures are less commonly hedged.

Hedge practices

Total Private Public < $1 B Public > $1 B

FX forwards remain the instrument of choice for firms that hedge currency exposure. Roughly one in five include options in their hedging programs, and a similar proportion of large public firms employ cross-currency swaps.

Hedge instruments

Total Private Public < $1 B Public > $1 B

Base: Companies that hedge any foreign currency exposure Total PrivatePublic

<$1 B >$1 BOptions (breakdown) 20% 20% 12% 22%

Purchased options 11% 11% 4% 13%Option collars 7% 5% 8% 10%Participating forwards 6% 7% 4% 6%Forward extras 4% 3% 4% 6%Average rate 1% 1% 0% 2%

93%13%

20%6%

98%

22%21%

10%

92%

12%16%

4%

89%

20%7%

4%

84%

83%

65%

18%

17%

58%

42%

64%

9%

12%

71%

63%

62%

12%

14%

77%

50%

44%

0%

11%

_________________________________ _______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ___________________________________


Balance sheet exposuresBalance sheet positions remain the most commonly hedged exposure.

Companies that hedge nonfunctional currency booked assets or liabilities

73%Roughly three in four companies hedge nonfunctional currency booked assets or liabilities.

Half of the respondents that hedge balance sheet exposures hedge over 75% of the exposure while the majority of hedgers also keep hedge tenors to less than three months.

Percentage of balance sheet positions hedged

Companies that hedge trade-related foreigncurrency accounts = 149

75% or more 48%

50% to < 75% 22%

25% to < 50% 10%

< 25% 20%

Companies that hedge �nance-related foreign currency accounts = 103

75% or more 53%

50% to < 75% 24%

25% to < 50% 9%

< 25% 14%

Maturities of balance sheet hedges

Companies that hedge trade-related foreign currency accounts = 149

12 months or more 10%

6 to < 12 months 12%

3 to < 6 months 9%

<1 to < 3 months 69%

Companies that hedge �nance-related foreign currency accounts = 103

12 months or more 16%

6 to < 12 months 13%

3 to < 6 months 10%

<1 to < 3 months 61%

Hedging activity

0

20

40

60

80

0

20

40

60

80

63%71%

57%

88%Finance-related

Trade-related

0

20

40

60

80

0

20

40

60

80

63%71%

57%

88%Finance-related

Trade-related


Hedging activity

Yes, the company elects hedge accounting under ASC 815 (FAS 133) for balance sheet hedges

0

20

40

60

80

>$1 B

0 30 60 90 120 150

TOTAL

PRIVATE

PUBLIC <$1 B

92%

89%

85%

97%PUBLIC >$1 B

Use of forwards, cross-currency swaps, and currency options

Forward contracts remain the most popular instrument for hedging balance sheet exposures.

Balance sheet position hedge instruments

Trade-related2016 2018

Forward contracts96% 95%Cross-currency swaps7% 8%

Purchased options9% 7%

Participating forwards4% 6%

Option collars6% 5%

Forward extras1% 1%

Other4% 3%

Finance-related2016 2018

Forward contracts90% 86%Cross-currency swaps10% 18%

Purchased options5% 6%

Forward extras3% 4%

Option collars6% 2%

Participating forwards3% 1%

Other4% 7%

Some companies seem to be replacing forward contracts with cross-currency swaps for hedges of finance-related positions. Respondents hedge balance sheet positions 21% of the time with instruments other than forward contracts.

Most companies do not apply special hedge accounting treatment to hedges of balance sheet positions.

Hedge election for balance sheet positions

Trade-related Finance-related Yes, the company elects hedge accounting under ASC 815 (FAS 133) for balance sheet hedges


35% 37%

25%

36%

Base: Companies that hedge foreign currency trade- or �nance-related balance sheet items

Type of hedge designation(s) for trade-related positions

Cash �ow hedge 69%

Fair value hedge 42%

Roughly one in three balance sheet hedging companies elect hedge accounting.

Type of hedge designation(s) for finance-related positions

Cash �ow hedge 50%

Fair value hedge 53%

30%

70%

Yes, elect hedge accounting under ASC 815 (FAS 133) for your trade-related balance sheet hedges

No

29%

71%

Yes, elect hedge accounting under ASC 815 (FAS 133) for your �nance-related balance sheet hedges

No


Hedging activity

Cash flow exposuresNearly two in three survey participants hedge forecasted transactions.

Companies that hedge forecasted foreign currency revenues and/or expenses

Total

62%PRIVATE 64%

PUBLIC 60%

62% VS. 63%The percentage of survey participants hedging forecasted transactions remains similar to the 2016 survey.

Respondents that hedge forecasted transactions tend to hedge for longer than one year and hedge coverage is generally less than 75% of the forecasted amount.

Maximum maturities for hedges of forecasted transactions

More than 40% hedge to a maximum maturity exceeding one year, and another 38% hedge to a maximum maturity falling between nine and 12 months.

3 months or less 10%

6 months 10%

9 – 12 months 38%

18 months 16%

2 years 12%

Greater than 2 years 14%

Percent of forecasted transactions hedged

Less than 25% 16%

25% to less than 50% 19%

50% to less than 75% 37%

75% or more 28%

The categories in this figure represent average coverage ratios for hedges of all maturities.


Hedging activity

Base: Companies that hedge forecasted REV or EXP (n=206)

64%21%

15%

Systematic risk management

Active hedging

Dynamic hedging

The use of forward contracts is nearly universal for hedges of forecasted transactions. Non-forward hedge solutions are more common for forecasted transactions than for balance sheet positions.

Forecasted transaction hedge instruments

Forward contracts90%

Purchased options12%

Cross-currency swaps8%

Option collars7%

Participating forwards6%

Forward extras3%

Other2%

27%of respondents hedge with instruments other than forwards


Approach to hedging forecasted transactions

When hedging forecasted transactions, survey participants tend to take a systematic approach and often layer their hedges.


Systematic risk management: Hedging a fixed amount of forecasted foreign currency transactions over a specific time period at regular intervals using specific hedge instruments.

Active hedging: Discretionary hedging of forecasted foreign currency transactions based on market conditions that allows for extending the hedge horizon, changing targeted percentage amounts or discretion in the hedge instrument.

Dynamic hedging: Using discretion not only when initiating hedges, but also during the life of the hedge.

Hedging program implementation

Large or public companies are more likely to layer their hedges over time while more small or private companies use a rolling approach.

Layering 47%

Rolling 36%

Static 10%

Other 7%


Base: Companies that hedge forecasted REV or EXP

Private

122

Public

84

<$1 B

113

> $1 B

93

Layering: The same exposure is hedged at multiple points in time. Hedge coverage of a single exposure is 'ramped up' over time.

35% 63% 31% 66%

Rolling: For each exposure, a single hedge is executed. Hedges are executed on a regular basis and with a consistent tenor to extend the hedge horizon.

44% 25% 46% 25%

Static: All hedges are placed at the beginning of the fiscal year and no additional hedges are placed until the next year.

14% 5% 16% 3%

Other 7% 7% 7% 6%

15%Dynamic hedging

21%Active hedging

64%Systematic

risk management


Hedging activity

Hedges of forecasted transactions can be used to accomplish multiple objectives.

0 10 20 30 40 50 60 70 80Ranked 1st Ranked 2nd Ranked 3rd

Purpose for hedging forecasted transactions



Private

122

Public

84

<$1 B

113

> $1 B

93Protect cash flow/margins at the entity level

26% 29% 27% 27%

Protect earnings at the consolidated level by hedging transactional cash flow

19% 38% 22% 32%

Protect both cash flows and earnings

51% 30% 47% 37%

Other 4% 3% 4% 4%

Objectives for hedging forecasted transactions

Base: Companies that hedge forecasted REV or EXP = 206

70%of companies indicate that smoothing the impact of FX rates is one of their top three risk management objectives.

Smooth the impact of changes in FX rates over time on our

company’s nancial performance70%

Protect budgeted results 53%

Assist in senior management's abilityto forecast our nancial performance 45%

Hedge rates are an important input tothe pricing of our goods/services 11%28%

Manage FX risks related to capital project 15%

Other 4%

Other

4%

27%Protect cash �ows/

margins at theentity level

27%Protect earnings atthe consolidated level by hedging

transactional cash �ow

42%Protect both

cash �ows and earnings


Base: Companies that designate cash �ow hedge: 104

33%

28%14%

25%

22%

Banking partner

Accounting/audit �rm

Internalsoftware

Other third-party vendor software

None3%Other

0

20

40

60

80

Hedging activity

Hedge accounting practicesHalf of companies that hedge forecasted transactions apply cash flow hedge accounting treatment.

Accounting convention to record foreign currency revenues and expenses

The average monthly rate is the most common accounting convention for foreign currency denominated transactions.

Elect hedge accounting under ASC 815 (FAS 133) for hedges of forecasted transactions


50%

36%

64%

73%


The percentage of respondents electing special accounting for hedges of forecasted transactions decreased from 57% in 2016 to 50% in 2018.

Large public firms are far more likely to elect hedge accounting treatment for hedges of forecasted transactions than private firms.

Assistance with hedge accounting

Banking partner33%

Accounting/audit firm28%

Other third-party vendor software25%

None22%

Internal software14%

Other3%

One in three companies utilize assistance from their banking partner.

8%Other

34%Average/month

33%Daily spot

25%Prior

month-end spot


Hedging activity

Translation exposuresHedges of foreign earnings translation or net investment related exposures are less common than hedges of balance sheet or forecasted exposures.

Currently hedging equity net investment in foreign subsidiaries

Total

12%PRIVATE PUBLIC

9%

14%

Currently hedging or in the past hedged equity net investment in foreign subsidiaries

Total

20%PRIVATE PUBLIC

12%

27%

A minority of companies hedge, or in the past have hedged, their equity net investments in local currency functional subsidiaries.

Currently hedging translated value of foreign currency net income

Total

14%PRIVATE PUBLIC

12%

16%

Currently hedging or in the past hedged the translated value of foreign currency net income

Total

18%PRIVATE PUBLIC

14%

21%

About one in seven companies report hedging the translated value of foreign currency net income.

TOTAL PRIVATE PUBLIC < $1B PUBLIC > $1B

Currently In the past Now or in the past

14%

18%

12%

3%

14%

11% 11%

22%

17%

4%

21%

4%

TOTAL

Currently

PRIVATE PUBLIC < $1B PUBLIC > $1B

In the past Now or in the past

Hedging activity

TOTAL PRIVATE PUBLIC < $1B PUBLIC > $1B

Currently In the past Now or in the past

TOTAL

Currently

PRIVATE PUBLIC < $1B PUBLIC > $1B

In the past Now or in the past

12%

8%

20%

9%

4%

12%

7%

0%

7%

18%

14%

32%

Hedging translation exposures by firm ownership and size Large public companies are relatively more likely to hedge net investment positions. Both private and large public companies indicate greater hedging of foreign earnings translation exposures than in the past.

Firms that hedge equity net investments in (positive net worth of) foreign subsidiaries

Firms that hedge without the benefit of hedge accounting to offset potential negative effects of earnings translation risks

14%

18%

12%

3%

14%

11% 11%

22%

17%

4%

21%

4%


12%

8%

20%

9%

4%

12%

7%

0%

7%

18%

14%

32%

Hedging activity


Exposure uncertainty, including the timing of settlement of balance sheet items, is the second most common factor inhibiting hedging after small exposure size. Resource constraints and other limits on the identification, tracking, and forecasting of exposures also present challenges to hedging.

Why participants do not hedge trade- and finance-related balance sheet positions

Trade-related2016 2018

Risk is too small47% 45%

Settlement of accounts payable/receivable is uncertain and we wish to avoid cash settlements

on balance sheet hedges24% 25%

Constrained resources to manage the positions effectively27% 17%

Hedge cost is too high16% 15%Lack of the ability to track and understand the size of the risks13% 15%

Base: Companies that do not hedge trade-related foreign currency accounts

Finance-related2016 2018


Timing of repayment of loans is uncertain and we wish to avoid cash settlements on

rolled hedge contracts

32% 23%

Intercompany loans are classified as long term in nature

34% 20%

Hedge cost is too high12% 13%

We are constrained by credit2% 10%We designate FX denominated

liabilities as a hedge of our foreign net investment

7% 5%

Base: Companies that do not hedge finance-related foreign currency accounts

Why they do not hedge forecasted revenues or expenses

2016 2018


Unable to accurately forecast our exposures32% 29%

Hedge accounting is difficult17% 20%

Senior management does not believe in hedging23% 18%

Lack the expertise/resources to hedge our forecasted

exposures effectively11% 15%

Do not fully understand our risks6% 8%Base: Companies that do not hedge forecasted transactions

2016 2018


Hedging activity

0

20

40

60

0

20

40

60

80

Forward contracts Cross-currency swaps

Summary: Balance sheet hedging, by firm ownership and sizeLarge public companies are relatively active hedgers of balance sheet items. When hedging, they are more likely to rely on forwards and cross-currency swaps and less likely to use options than private firms.

Yes, the company hedges recorded foreign currency trade-related balance sheet positions


71%

58%

77%84%

Base: Companies with trade-related balance sheet items

Yes, the company hedges recorded foreign currency �nance-related balance sheet positions


63%

42%

50%

83%

Base: Companies with �nance-related balance sheet items

Yes, the company hedges recorded foreign currency trade- or �nance-related balance sheet positions


73%

60%

74%

88%

Base: Companies with trade- or �nance-related foreign currency balance sheet positions

Use of forwards, cross-currency swaps, and currency options

Options Total PrivatePublic

<$1 B >$1 B

Purchased options 8% 11% 0% 8%

Option collars 5% 3% 0% 7%

Participating forwards 6% 8% 5% 5%

Forward extras 3% 3% 5% 2%

Base: Companies that hedge foreign currency trade- or finance-related balance sheet items

92%

89%

85%

97%

14%

8%

15%

19%

Total

Private

Public<$1B

Public>$1B


Protect cash �ows/margins at the entity level

Protect earnings at the consolidated level by hedging transactional cash �ows

Protect both cash �ows and earnings

Other

Companies that hedge forecasted Rev or ExpLarge public �rms

13%

23%

40%

24%

16%

19%

37%

28%

< 25%

25% to < 50%

50% to < 75%

75% or more90%

88%

93%

94%

8%

5%

7%

13%

Total

Private

Public<$1B

Public>$1B

Forward contractsCross-currency swaps

All such �rms Public �rms with revenues > USD 1 B

27%

27%

42%

4%

29%

36%

33%

3%




Other


13%

23%

40%

24%

16%

19%

37%

28%

< 25%

25% to < 50%

50% to < 75%

75% or more90%

88%

93%

94%

8%

5%

7%

13%

Total

Private

Public<$1B

Public>$1B


62% 65%

All companies Large public �rms


27%

27%

42%

4%

29%

36%

33%

3%




Other


90%

88%

93%

94%

8%

5%

7%

13%

Total

Private

Public<$1B

Public>$1B


62% 65%



27%

27%

42%

4%

29%

36%

33%

3%




Other


13%

23%

40%

24%

16%

19%

37%

28%

< 25%

25% to < 50%

50% to < 75%

75% or more

Summary: Forecasted transaction hedging, by firm ownership and sizeWhen hedging forecasted transactions, most companies hedge greater than 50% of the notional amount.

Purpose for hedging forecasted transactions


Hedge forecasted foreign currency transactions


62% 65%

Hedge instrumentsUse of forwards, cross-currency swaps, and currency options

Hedge coverage


<$1 B >$1 B

Purchased options 12% 10% 7% 16%Option collars 7% 6% 14% 9%Participating forwards 6% 8% 0% 4%Forward extras 3% 2% 0% 6%

Base: Companies that hedge forecasted foreign currency revenues or expenses

13%

23%

40%

24%

16%

19%

37%

28%

< 25%

25% to < 50%

50% to < 75%

75% or more

Hedging activity

62% 65%


27%

27%

42%

4%

29%

36%

33%

3%

90%

88%

93%

94%

8%

5%

7%

13%

Total

Private

Public<$1B

Public>$1B



Hedging activity

Layered hedges

Rolling hedges

Annual/statichedges

OtherCompanies that hedge forecasted transactions

Large public �rms

Companies that hedge forecasted transactions

Large public �rms


Large public �rms4%

0%

0%

16%

14%

31%

10%

10%

4%

34%

16%

12%

14%

3 months or less

6 months

9 months

12 months

18 months

2 years

Greater than 2 years Yes, the company elects hedge accounting

under ASC 815 (FAS 133) for hedges of forecasted transactions

0

20

40

60

80

Base: Companies that hedge forecasted foreign currency transactions

50%

36%

64%

73%

TOTAL PRIVATE PUBLIC <$1B

Systematic riskmanagement

Active hedging

Dynamichedging

PUBLIC >$1B

47%

36%

10%

70%

19%

4%

7%

Layered hedges

Rolling hedges

Annual/statichedges

OtherCompanies that hedge forecasted transactions

Large public �rms


Large public �rms


Large public �rms3 months

or less

6 months

9 months

12 months

18 months

2 years

Greater than 2 years

0

20

40

60

80

64%

21%

15%

60%

27%

13%

Systematic riskmanagement

Active hedging

Dynamichedging

Summary: Forecasted transaction hedging, by firm ownership and sizeWhen hedging forecasted transactions, large public companies are more likely to layer hedges, to hedge to relatively long tenors, and to designate hedges for hedge accounting.

Hedge application

Maximum hedge tenor

Yes, the company elects hedge accounting under ASC 815 (FAS 133) for hedges of forecasted transactions


50%

36%

64%

73%

Base: Companies that hedge forecasted foreign currency transactions

4%

0%

0%

16%

14%

31%

10%

10%

4%

34%

16%

12%

14%

64%

21%

15%

60%

27%

13%

47%

70%

36%

19%

10%

4%

7%


Hedging activity

Forward contracts Cross-currency swaps

Instrument usage for all hedges, by firm ownership and size Virtually all survey participants hedge with forwards. Roughly one in five firms include options in their hedging program, and one in five large public companies include cross-currency swaps.

Use of forwards and cross-currency swaps


<$1 B >$1 B

Purchased options 11% 11% 4% 13%

Option collars 7% 5% 8% 10%

Participating forwards 6% 7% 4% 6%

Forward extras 4% 3% 4% 6%

Average Rate 1% 1% 0% 2%

Base: Companies that hedge any foreign currency exposure

93%

89%

92%

98%

13%

7%

16%

21%

Total

Private

Public<$1B

Public>$1B

Survey participants

ReykjavikReykjavik


Survey participants

Private

Public

Industry Public vs. private Industry

Manufacturing 38%

Other 18%

Technology 16%

Wholesale Trade 12%

Healthcare/Pharma 5%

Finance/Insurance 4%

Energy 4%

Retail 3%

Parent company location


U.S. 84%

Canada 5%

Germany 2%

U.K. 2%

Austria 1%

Japan 1%

Bermuda 1%

Europe (non-Euro region) 1%

Italy 1%

Netherlands 1%

Switzerland 1%

Title at company

Total


Treasurer/Assistant Treasurer 38%

Finance Manager/Cash Manager 18%

CFO 18%

Controller/Account Manager 12%

CEO/President 3%

Director of Treasury/Finance 2%

Treasury Analyst 2%

Risk Manager 2%

Treasury Manager 1%

VP/Senior VP of Finance 1%

Annual revenue



$1 billion to $5 billion 28%

$500 million to < $1 billion 15%

$100 million to < $500 million 22%

< $100 million 19%

58% 42%


Survey participants

Yes, company hassubsidiaries inforeign jurisdictions

Europe (euro region)

Canada

U.K.

China

Mexico

Australia

Brazil

India

Europe (non-euro region)

Japan

Middle East

New Zealand

Africa

Central America

Other Asia/Paci�c Rim

Other South America

76%

71%

70%

59%

56%

54%

49%

46%

44%44%

33%

25%27%

21%42%

27%

67% 71%

52% 56%

17% 21%

45% 49%

23% 27%

74% 76%

38% 44%

65% 70%

37% 46%

60% 59%

46% 44%

49% 54%

20% 27%

41% 42%

23% 25%

23% 33%

2016 2018Base: International presence via foreign subsidiaries

208 259

Canada

Mexico

Central America

Brazil

Other South America

Europe (euro region)

Europe (non-euro region)

U.K.

India

China

Japan

Australia

New Zealand

Other Asia/Paci�c Rim

Africa

Middle East

22%

Yes, company hassubsidiaries inforeign jurisdictionsNo

78%

Private Public

66% 96% 64% 97%

34% 4% 36% 3%

Revenues<$1 B

Yes, company has subsidiaries in foreign jurisdictions


No

Revenues>$1 B

Large and public companies are more likely to operate foreign subsidiaries. Nearly all large and public firms report having foreign subsidiaries, while only half to two-thirds of private and smaller companies have them.

Foreign subsidiaries By firm ownership and size


Private Public Revenues<$1 B

Revenues>$1 B

Yes, company has subsidiaries in foreign jurisdictions

66% 96% 64% 97%

No 34% 4% 36% 3%

Companies appear to be enlarging the range of countries in which they have subsidiaries, with expansion into already dominant countries such as Canada, Mexico, and the U.K., as well as less common areas such as Central America, Brazil, India, and non-euro countries in Europe.

Regions where foreign subsidiaries operate

Europe (euro region) 76%

Canada 71%

U.K. 70%

China 59%Mexico 56%Australia 54%

Brazil 49%

India 46%

Europe (non-euro region) 44%

Japan 44%

Middle East 33%

New Zealand 27%

Africa 25%

Central America 21%

Other Asia/Paci�c Rim 42%

Other South America 27%

Base: International presence via foreign subsidiaries

2016 2018

208 259

Canada 67% 71%

Mexico 52% 56%

Central America 17% 21%

Brazil 45% 49%

Other South America 23% 27%

Europe (euro region) 74% 76%

Europe (non-euro region) 38% 44%

U.K. 65% 70%

India 37% 46%

China 60% 59%

Japan 46% 44%

Australia 49% 54%

New Zealand 20% 27%

Other Asia/Paci�c Rim 41% 42%

Africa 23% 25%

Middle East 23% 33%

22% No

78%


Survey participants

0% 20% 40% 60% 80% 100%

In each geography, it is common to use the local currency as functional currency.

Local/foreign currency U.S. dollar

Europe (euro region) (n=198) 89% 11%

Canada (n=185) 79% 21%

U.K. (n=181) 90% 10%

China (n=152) 87% 13%

Mexico (n=145) 74% 26%

Australia (n=139) 88% 12%

Brazil (n=128) 86% 14%

India (n=120) 84% 16%

Europe (non-euro region) (n=115) 90% 10%

Japan (n=115) 89% 11%

Other Asia/Paci�c Rim (n=108) 78% 22%

Middle East (n=86) 74% 26%

Other South America (n=71) 79% 21%

New Zealand (n=71) 86% 14%

Africa (n=65) 85% 15%

Central America (n=54) 72% 28%

This is for informational purposes only, and are not an offer, solicitation, recommendation or commitment for any transaction or to buy or sell any foreign exchange or other financial product (unless expressly stated otherwise), and are not intended as investment advice. Any market price, indicative value, estimate, view, opinion, data or other information is not warranted as to completeness or accuracy, is subject to change without notice, and Wells Fargo accepts no liability for its use or to update or keep it current. As used in this disclaimer, “Wells Fargo” means Wells Fargo & Company and its subsidiaries, including Wells Fargo Bank, N.A. Foreign exchange products are offered by Wells Fargo Bank, N.A. unless expressly stated otherwise. Wells Fargo Bank, N.A. is a swap dealer registered with the Commodity Futures Trading Commission and is a member of the National Futures Association.

The information may not be appropriate for, or applicable to, some or any of your activities or circumstances. Accordingly, Wells Fargo makes no express or implied promises, commitments, guarantees, representations, or warranties with respect to any of the information, including, without limitation, any express or implied warranty of fitness for a particular purpose. Wells Fargo strongly recommends that you seek your own independent professional advice before using or acting on any information relating to a foreign exchange or other financial product. Any recipient that is a “Special Entity” within the meaning of 17 C.F.R. §23.401(c) is hereby notified that this communication (including any attachments) does not, is not intended to and should not be interpreted as an expression of an opinion within the meaning of 17 C.F.R. §23.440 by any person on behalf of Wells Fargo as to whether such Special Entity should enter into any swap or trading strategy involving a swap. © 2018 Wells Fargo Bank, N.A. All rights reserved. IHA-5394801

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