solution

With its network of 140 breweries and countless distributors in more than 71 countries worldwide, Heineken face foreign exchange (FX) risk on a daily basis (Heineken 2012). In general, the company seeks protection against the risks associated with the changing value of the currencies that its business units use in their daily transactions. Its general policy is to eliminate up to 90 per cent of the routine exposures that it forecasts, generally comprised of the gap between revenues that it accumulates in US dollars and production costs that it incurs in local currencies. At year-end 2011, for instance, Heineken estimated that a 10 per cent fall in the value of the dollar would have reduced its equity position by approximately €14 million (down from €38 million the year before). Its currency management policy had succeeded in keepng this risk under control, especially in light of the group’s €1 billion in consolidated 2011 profits.

Retrospectively, however, it is difficult to say whether Heineken’s prudent policy of always protecting itself against a weaker dollar was a good thing. In fiscal year 2008, for instance, the company averaged selling the US currency at around $1.26 per euro. Compared with 2009’s lower average exchange rate of $1.43, this might seem to have been a good move. But then in 2010, the company sold the dollar at an average 1.35, meaning that Heineken would have benefited greatly had it not already sold off its 2009 dollar revenues and just held on to them until 2010. Of course, regrets can be a double-edged sword. Had Heineken decided to change its risk management policy to take advantage of future dollar strength, it would have suffered in 2011 when the currency fell to close to 1.50 against the euro—before turning around to hit a new high of around 1.20 in 2012.

This kind of volatility means that without a crystal ball, the corporate treasurers in charge of Heineken’s currency exposure can never be sure what the dollar exchange rate will be in one day’s time, much less in one year. That makes it very risky not to cover the company against its worst case scenario. The problem is that protective strategies of this kind also prevent it from making unexpected, so-called ‘windfall’, profits in case the dollar strengthens. In this sense, Heineken’s decision to cover its FX risks creates a new risk.