On average, the dollar has demonstrated significant weakness against the pound over the past three years. Comparing the spot rate in December 2005 to December 2006, the exchange rate declined by 14%. Not surprisingly, and particularly for US law firms with operations in the UK, these changes have presented significant operational challenges and some perception management challenges, especially when reporting results to legal publications in the UK and Europe.
Managing the operational challenge posed by sharply changing exchange rates is straightforward. Firms such as Covington & Burling purchase hedging instruments from financial institutions to minimise the exchange rate risks to the firm. If firms do not avail themselves of these types of financial products, they then absorb the full impact of the swings in exchange rates and the full impact of the affect of currency volatility on profits.
