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FX Management

According to the latest Bank for International Settlements (BIS) survey of foreign exchange volumes, in 2013, almost $5.3 trillion in currencies globally are traded daily. The increasing volatility in the exchange rates of the 160 currencies in the world today and their future value will always be a major problem for corporate treasurers. A vital part of the treasurer's job is to protect the margin on their production, to shield the company from the impact of foreign exchange (FX) fluctuations on the earnings of their company, and to protect its value.

FX Volumes
There are basically two FX markets: the spot market and the forward market. Spot rates are typically quoted for delivery (or settlement) of currency one or two business days following the date of the trade. For FX, rates initiated from the USA, regular spot settlement of Canadian dollars and Mexican pesos settlement is one business day, while regular spot settlement of European and Asian currencies is normally two business days. The BIS estimated that the daily traded FX volume increased from USD 4 trillion in April 2010 to $5.3 trillion in 2013. This represents a 24.5% gain which is slightly more than the 20% increase observed between 2007 and 2010. Spot transactions now represent 38% of the FX market. There was also moderate growth in outright forwards (which now account for 13% of the total market) while the largest segment, FX swaps, decreased from 44% in 2010 to 42% in 2013. There was a small (1%) decrease in FX Options. Some 9% of daily volumes are thought to be from/to corporates.

Company FX Policy
The main options in company FX policies are:

  • a passive policy: not reacting to or covering FX exposure at all
  • a defensive policy: eliminate all FX exposures, as soon as they are detected
  • an active/offensive policy of either:
    • covering particular key or large exposures and not others
    • actively trading FX exposures for profit.


Effective FX Management
The main elements in effective FX management - buying and selling FX, settlement of FX deals, confirmation matching, and FX risk management - hedging and exposure management, are reviewed in this section.

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