Currency fluctuations risky for small firms

By Michael White

LOS ANGELES (AP): As world financial upheavals inspire seesaw fluctuations in the dollar's value, small and medium-sized companies are hedging their bets against the sudden changes that can turn a profit column into a well of red ink.

To deal with volatility in Asia, Russia and other parts of the world, companies that do business in more than one currency have had to become savvy about the arcane world of currency trading and hedge funds.

"This really has a dramatic impact on us," said Mark Malbon, executive vice president and chief financial officer of electronic keyboard seller Roland Corp. U.S. "If the dollar changes value against the Japanese yen, that has direct impact on our purchasing power here."

Roland U.S. buys electronic musical instruments such as keyboards and synthesizers from its Japanese parent, Roland Corp., to sell in the United States. Because the company must buy in yen and sell the product in dollars, currency fluctuations can have a big impact on Roland's profits.

Roland has been able to navigate yen-dollar swings of as much as 30 percent in recent months by relying on yen futures contracts -- deals in which Roland pays a premium to ensure that it can buy yen at a fixed price at a later date. The contracts have helped smooth out peaks and valleys in currency value that can disrupt Roland's cash flow, said Malbon.

"Whether you're an importer or exporter, it means your prices against Japan have either gone to your favor or gone against you by 30 percent. That's a big move," said Tomoko Iwakawa, vice president and foreign exchange advisor at Union Bank in Los Angeles.

"It could easily wipe out or increase their profit margins," said Iwakawa, who has counseled Roland on currency contracts.

The situation is the same for scores of companies, large and small, that do business in more than one currency. British Airways PLC, for example, reported losing US$335 million because of currency fluctuations for the fiscal year that ended March 31. Eastman Kodak Co. has reported that it expects to lose $384 million to currency volatility. Coca-Cola Co. has said that 1998 earnings could fall by as much as 10 percent because of currency fluctuations despite hedging.

Hedging may not always be the best strategy to combat currency fluctuations for several reasons, said Tom Copeland, a corporate financial consultant with Monitor Co. in Cambridge, Massachusetts.

"It's perfectly understandable, with volatility increasing in exchange rates, that more companies want to hedge, but they ought to carefully evaluate the costs and benefits from hedging, because it's not a panacea," Copeland said.

Because hedging can be risky, companies with high profit margins generally are better off riding out currency fluctuations, he said.

Hedging works best over a short period of time, when companies can forecast income and expenditures with reasonable accuracy, he said. Attempting to forecast for periods of six months or more reduces the prospect that the hedge will be beneficial.

Copeland also believes companies should not buy currency futures contracts in an attempt to bolster earnings.

"Companies need to be very clear about their motivation for hedging. Some boards of directors want to have hedging just to smooth earnings. If that's your only motivation, you're paying to maintain a hedge basically for the purpose of window dressing," he said.

But some successful companies have longstanding policies of hedging to protect earnings. Among them is toy giant Mattel Inc., whose dependence on overseas suppliers and foreign sales makes it vulnerable to losses from currency fluctuations.

"We try to minimize volatility in our profit-and-loss statement. We want to protect our revenues," said Renee Lynch, a senior treasury analyst for Mattel. "By hedging, we can smooth out some of our market volatility, or at least minimize some of the impact on our bottom line."

At Roland, the strategy is to protect the company's ability to buy adequate inventory from its parent. The company typically ventures no more than 45 days to 60 days ahead in currency futures, said Malbon.

"We try to be prudent, we try to be relatively conservative. We do this on a defensive posture. We're not into it for long- term speculation. We're in the music business, not the foreign exchange business," he said.

During the past year, Union Bank advised clients to avoid risky speculation on the dollar's rise against Asian currencies, said Iawakawa. For example, as the dollar climbed steadily to an exchange rate of 145 yen in August, some clients were reluctant to lock in contracts because of forecasts that predicted that the rate would reach 180 yen to the dollar.

Caution paid off in October, when the dollar fell 14 percent -- the biggest drop in a quarter century -- on news that the Japanese government had agreed on a plan to repair its economy. In recent days, the dollar has been trading at a rate of between 113 and 115 yen.

"We were trying to tell our customers not to be too greedy," said Iwakawa. "At least Union was not too embarrassed when this happened."