By Nina Trentmann
Germany-based pharmaceuticals company Merck KGaA has revamped its hedging policy to protect against unfavorable shifts in currency-exchange rates sparked by global trade tensions.
The company shortened the horizon of its currency hedges to one year from three years while expanding the hedging program to cover revenue in all currencies in which it does business, Chief Financial Officer Marcus Kuhnert told CFO Journal on Tuesday.
"Currencies have become more volatile, and there is more risk potential because of international trade disputes," Mr. Kuhnert said.
The Darmstadt-based pharmaceuticals, chemicals and life sciences company operates in more than 60 countries but previously hedged currency exposure to revenue in only six currencies: the U.S. dollar, Chinese yuan, Japanese yen, Korean won, Taiwan dollar and Swiss franc.
Merck also set a cap for the maximum negative impact that foreign-exchange fluctuations should have on its cash flow. "We are taking extensive measures to make sure that the potential effect of currency losses does not amount to more than 5% of our cash flow," Mr. Kuhnert said.
The company expects a positive earnings effect of as much as 2% from currencies this year. "In 2019, we will benefit from the strength of the U.S. dollar and Asian currencies," Mr. Kuhnert said.
However, the weakening of certain South American currencies and of the Turkish lira could soften the impact, especially for Merck's health-care business, which generates a significant share of its revenue in Latin America. The company had previously forecast a 3% to 4% negative impact from foreign-currency effects in 2019.
Companies typically hedge foreign-exchange risk by paying a small fee to lock in the exchange rate of certain currency pairs in the future. This can protect the company against adverse moves in exchange rates, but it also can increase costs and cause a firm to miss out on beneficial currency fluctuations.
Merck's move comes as global currencies have gyrated wildly in response to renewed trade tensions between the U.S. and China and concerns about the health of the global economy. Meanwhile, political uncertainty and weaker economic data from emerging markets including Argentina and Turkey have hurt the value of those currencies.
Merck is currently hedging around 40% of its exposure to foreign currencies. "This ratio can be increased to 90% if necessary," Mr. Kuhnert said.
Write to Nina Trentmann at Nina.Trentmann@wsj.com
(END) Dow Jones Newswires
May 14, 2019 14:59 ET (18:59 GMT)
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