Global firms sharpen currency hedging on euro concern

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Firms are increasingly turning to tools such as currency options -- which give them the right but not the obligation to buy or sell a currency at a particular exchange rate - to protect against extreme volatility. They are also trying to maximize ways of naturally hedging their exposure by trying to match assets and liabilities in a particular currency.

"There are more questions that are raised now -- questions that were never raised before are now coming to the surface," said Marc Zenner, co-head of Corporate Finance Advisory at JPMorgan Investment Banking , speaking in New York.

"If you had any of these contracts or agreements a couple of years ago you would probably not even have dared to ask the question, 'OK, what would it mean if countries X, Y, Z leave the euro.' That would not have been even part of the discussion."

Tech giant Hewlett-Packard <HPQ.N>, for example, has added the possibility of a country exiting the euro and currency volatility due to the European debt crisis to the list of disclosures about risks to its business. HP gets about 65 percent of its sales from countries outside the United States.

"In the event that one or more European countries were to replace the euro with another currency, HP sales into such countries, or into Europe generally, would likely be adversely affected until stable exchange rates are established," HP said in a filing with the U.S. Securities and Exchange Commission last month.

Discussions about managing currency risk are taking place at the highest levels of management because of the sheer scale of the potential impact of a euro zone break up. Once the purview of the treasurer, the topic now exercises the CEO and the CFO, often prompted by questions from the board.

Jacques Brand, Global Co-Head of Investment Banking Coverage and Advisory at Deutsche Bank , recounted a November conversation with a CEO of a large company based in the U.S. Midwest, which sees a significant portion of its revenue base come from outside the United States.

"He had never hedged foreign exchange, but it was now a topic of conversation he was personally involved in," Brand said in an interview in New York. "Risk management on a global basis is now the topic at the CEO and board level and we are in active dialogue around hedging strategies."

"Historically, the CEO, the board, the CFO and the head of M&A have relegated risk management activities. In this volatile environment, the treasurer is working more closely than ever with senior management," Brand said.