A black swan event is a metaphor that describes an event which:
- Comes as a complete surprise
- Has a major effect
- Is rationalised afterwards with the benefit of hindsight
The 2008 Financial Crash is a good example of a black swan event. At the time the global economy was riding a wave of prosperity. The downturn was sudden and caught the majority of politicians, economists and citizens by complete surprise. Its effects were catastrophic and felt far and wide.
With the benefit of hindsight, we have now come to understand that the tell-tale signs of such an event were hiding in plain sight.
Such events are very difficult to predict. But the one thing which is certain is that these events do occur with regularity over the course of history.
The idea of a black swan event was pioneered by the finance professional Nassim Taleb. He argued that it is important for people to always assume a black swan even is a possibility, whatever it may be, and to plan accordingly.
So how can you plan for black swan events when it comes to managing foreign exchange risk?
Firstly, it is important to challenge the assumption that most SMEs have that these events are extremely rare and so it is largely futile to prepare for them. Such events can and do occur. In addition, there are solutions out there to mitigate against them.
Secondly, it requires a change in perspective. The objective of foreign exchange hedging should be to avoid the worst-case scenario not to try and profit by ‘beating the market’. Hedging strategies should be designed in line with a company’s commercial objectives first and foremost, not a directional view of the currency markets.
And thirdly, it is to recognise that such events represent an opportunity. As Taleb says – a black swan event depends on the observer. For example, what may be a black swan surprise for a turkey is not a black swan surprise to its butcher; hence the objective to ‘avoid being the turkey!’
Black swan events ultimately represent an opportunity for competitive advantage and business growth. Whilst unprepared competitors re-actively deal with the fall out of such events, the company which has already taken steps to mitigate against the impact can win market share.