Currency risk a concern for Swiss companies. Two examples.
How do Swiss companies handle currency risks? Ronda AG and Walter Matter SA each follow a different strategy. However, currency management is important for both the watch movement manufacturer and the commodity trader.
Swiss SMEs are exposed to currency risks
Swiss companies are largely hedged against currency risks. A Credit Suisse survey of 766 companies on currency management showed this. Fluctuating foreign exchange rates affect more than just large corporations; SMEs are also exposed to considerable currency risks. One example is the watch movement manufacturer Ronda. The company is headquartered in Lausen in the canton of Basel-Land and delivers watch movements to the global market; however, their production mainly takes place in Switzerland.
Ronda generates about 30 percent of their revenue in foreign currencies. Yet only 20 percent of their spending is done in foreign currencies. This leads to a foreign currency surplus. "We would like to sell this as favorably as possible," Dominik Schneider says in an interview. He has been head of finance at Ronda AG for five years. He optimizes transactions from US dollars to Swiss francs using ratio knock-out forwards (RKOF). Currently, Schneider invests a portion of his liquidity in dual currency deposits. "This is because we would have to pay to park money in Swiss francs owing to negative interest rates."
Currency hedging against all eventualities
Walter Matter SA is even more exposed to currency risk. The Genevan commodity trader deals in coffee and cocoa. While Ronda AG sells mainly in Swiss francs, Walter Matter SA's transactions are mostly in US dollars and other foreign currencies. Contracts are signed up to two years in advance. Thus, chief financial officer Roger Fry hedges against all eventualities.
"Forward transactions are the most important thing for us. With forward contracts, we can define the price at which we are going to trade a foreign currency for Swiss francs or another currency on a given day," explains Fry in an interview. In addition, he uses swap transactions to postpone the due date if the delivery or payment is delayed, and spot transactions when he has too much or too little liquidity in one currency. Both companies actively pursue currency management in order to hedge risks and seize opportunities.
Currency risk of the strong Swiss franc
Both Ronda AG and Walter Matter SA keep their books in Swiss francs. And it appears that currency risks influence the course of business despite active currency management. To be specific, both companies feel the effects of a strong Swiss franc. "A strong franc reduces our margin," explains Roger Fry. "Ultimately, we can't simply sell the goods at a higher price just because we take in a smaller margin after conversion into Swiss francs." The commodity trader was definitely doing better when the dollar was strong.
Because sales take place primarily in Swiss francs, the strong franc has a less direct effect on turnover at Ronda AG. However, the watch movement manufacturer feels it indirectly even more strongly. "The watch industry – and hence our clients – slid into a crisis after the Swiss franc shock. Demand for Swiss watches collapsed," explains Dominik Schneider. However, he is hopeful for 2019. Client feedback and incoming orders promise better times.