European structural problems notwithstanding, the dollar has lost nearly 8% of its value relative to the euro so far this year. Japan, which has problems of its own, actually has seen its currency trade well against the dollar over the same period. This has created a profitable dynamic for U.S. manufacturers exporting overseas, a dynamic that could well reverse itself. It's Ryder's job, he says, to protect his company "against the strong dollar."
Ryder's outlook is not unique among finance professionals. "Right now, the concern is on the dollar and all of the major currencies are better valued than the dollar," according to Mary Ann Dowling, an analyst at Treasury Strategies. "The biggest issue for U.S. companies is really understanding where their exposure is, and how to hedge against it."
Eastman, when it was founded in the 1920s to supply chemicals to the photographic industry, both spent and made practically all its money in U.S. dollars. Since then, it has diversified -- in terms of product line, and end markets -- booking about half its $5.8 billion in 2010 revenue from customers outside the U.S. and Canada.
But the company, which has production facilities in nine countries, still makes most of its product in the U.S. "Most of our costs are in USD," Ryder says. "Our sales contracts are not."
All of Eastman's protection against the risk of a rising dollar -- which would have the effect of decreasing the dollar value of foreign revenues -- is provided in the form of financial hedging, primarily with options that enable the company to "lock in an exchange rate that we want to receive in receivables," says Ryder.
"The euro and the yen are our greatest exposures," he explains. Under the current environment, in which the euro is worth nearly $1.50, "we will sell euros at 150 and lock in that rate." When the euro hits 150, he adds, "we may choose to buy puts so we're protected."
Most of this hedging is of the plain vanilla variety, involving short-term instruments. In addition, he says, he hedges "a certain portion of anticipated sales," by buying longer contracts, typically of no more that two- to three-years' duration. All this is done to offset business risks, and qualifies for hedging treatment under FAS 133, eliminating the need to mark the instruments to market.
In addition, there are swaps. "Let's say I'm funding something today in dollars but I really need Swiss francs in the next 60 days," says Treasury Strategies' Dowling. One solution, she says, may be to buy or sell an offsetting option, swapping out the exposure.
But whether you use the plain vanilla strategy, which "does reduce your volatility," or employ more exotic tactics, it is important to consider risk in totality, says . "Unfortunately, some companies hedge based on their receivables rather than true economic risk," she says. Hollein was previously a managing director of financial risk management for KPMG, where she led the treasury practice. Prior to joining KPMG in 2005, she held senior financial executive management positions at Ruesch International, ABN Amro Bank, Citibank and Westinghouse Electric Corp.
She points to the example of a U.S. telecom buying a company abroad. While awaiting SEC approval, "the dollar moved against them and the price went up" by about $10 million. "They ended up doing the deal but they wound up hedging the contingent exposure."
"The ideal would be to naturally net your receivables and payables," she says. Although this ideal may prove practically unattainable, there are moves a company can make, such as borrowing in the foreign currency or locating a facility overseas, that can move this goal forward.
Back at Eastman Chemical, Ryder, whose job is to hedge against both currency and commodity exposure, is quick to downplay the natural approach, emphasizing the challenges facing risk professionals. "I'm tired of all these once-in-a-decade and once-in-a-lifetime things happening all the time," he says. "The markets are getting fatigued." The bottom line: "The more volatility in the currency market you get a higher discount to your stock. If you do nothing you're going to get hammered."
"Whether we locate a facility in the foreign country, the currency risk has no place in the decision," he says. "We don't locate the facility as a primary means to hedge on the currency front, although these is some natural offset."
"My food chain basically goes to the treasurer and the CFO," he says. "People don't invest in Eastman to invest in currencies," he adds, defining his responsibility as giving "cover to the CFO so he doesn't have to talk about this stuff."