“A person who is not willing to take risk is living in a fantasy world”
Gudrun Kropp

In the current environment, real rays of hope have become few and far between – not a day goes by without more bad news about the economy or the banking sector. And many customers are becoming overly cautious when it comes to addressing the subject of “active financial management”. The rebirth of “traditional” and “conservative” financial management approaches gives rise to the impression that there is a way to structure financial management so as to eliminate risk. In practice, such an approach would look something like this:

• Only long-term, fixed-rate loans for financing
• Payment for exports / imports exclusively euro-based
• Procurement of raw materials via 12-month fixed-price contracts

Unfortunately, this is an illusory goal. Any attempt to create the image of a volatility-free world in financial management ignores reality. We all see how realistic, for instance, the “abnormally smooth returns” of Mr. Madoff turned out to be.

Operational decisions require flexibility. When investment plans are halted or restructured, financing must also be readily adaptable. A money market rate near zero not only gets investors’ attention, but also serves as a last wakeup call to those fixed-interest fans who were recently happy to have secured “low” rates: a fixed rate stays fixed and is secure, but also precludes participation in falling money market rates.

When foreign currencies experience extreme devaluation, traditional home-currency invoicing results in an “economic Waterloo” when it comes to sales turnover. And, it should not be overlooked that the greatest volatility in commodity markets has recently been for contracts up to 12 months.

Financial management is only risk-free when operations and financing are synchronised. And the only way to accomplish this is by using financial instruments.

L.K.