In the COVID-19 crisis managing FX volatility is one of the top five things that corporate treasury departments are focusing on. But managing FX risks is not a one-off exercise, it requires constant attention and a sound approach that works all the time. Here we describe two very different approaches.
Atlas Risk Advisory approach
A recent paper by Scott Bilter, a Partner with Atlas Risk Advisory recommends that companies:
- Are realistic about your company’s ability to adequately manage FX risk on its own. For a start-up company, there is likely a modest-sized finance team with no dedicated treasury personnel. A mid-sized company may have a Treasurer and perhaps one or two other treasury members, but no one dedicated entirely to FX. Only large, well-established multinational companies will likely have the scale to support a dedicated FX team, where there can be a reasonable expectation of retaining an adequate level of continuous FX expertise.
- Don’t let accounting tail wag the dog: It is crucial for the FX professional to play a significant role in interpreting the FX accounting rules for their particular situation. They need to find an optimal solution to an FX related problem, it is typically the case that a valid interpretation of the FX accounting rules can support such a solution.
- Partner with the business: Treasury personnel also need to understand how FX is handled within the sales force. Do international sales personnel have USD based quotas or local currency based quotas? If they are selling in the local currency, but have USD based quotas, what rate is being used to convert to USD? Only the FX professional who understands the major drivers and cycles of their business can have a meaningful discussion on how to best hedge cash flow risks.
- Understand cash flow and balance sheet interaction: An FX swap that has an offsetting far leg that serves as an adjustment to the balance sheet hedge is, therefore, the best way to deal with liquidity management without creating unwanted FX volatility. When a well thought out balance sheet hedging program separates liquidity management from the true drivers of balance sheet volatility, there is no need to have to forecast the timing of collections or payables (which is not an easy task).
- Don’t be the sucker at the poker table: Don’t to enter into an FX trade with any less information than your counterparty. If you trade FX over the phone without live prices in front of you, you are most likely leaving a lot of money on the table. Banks make a high percentage of their FX trading profits off the low percentage of their clients with the least market knowledge. You don’t have to have an expensive Bloomberg terminal in front of you in order to see live prices, so no investment is needed to know where the market is. There are numerous websites that show streaming FX spot prices.
Bilter concludes that:
- “Even though creating a highly effective FX hedging program is a difficult task, the downside of not doing so can be enormous. It is not uncommon to hear a CEO or CFO blame currency volatility for a quarterly earnings miss, and investors have little patience for these types of surprises.
- As complex and fast-moving as today’s businesses have become, Treasury organizations need to quickly become efficient at managing the evolving risks.
- By following these guiding principles.”
FX Hedging on TreasurUp
TreasurUp is an intelligent electronic banking front end which has been designed for and together with small-and mid-cap companies. It is white labelled by banks around the world to make their cash management offering much more attractive to small-to-medium enterprises. It offers two different approaches to FX hedging via two modules:
- 1-to-1 hedging: For corporates that hedge invoices or orders individually in line with their hedging policy. 1-to-1 hedging too allows corporates to upload (large) sheets of orders or invoices or to retrieve them straight from their bookkeeping platform (ERP). TreasurUp will hedge batches instantly and fully according to the company’s hedging policy
- Forecast hedging: for corporates that are going to receive and/or pay certain foreign exchange cash flows in the future whereby it is not fully clear what the exact amounts will be or when they will be settled.
CTMfile take: Both of these different approaches/solutions use a structured and consistent approach to FX hedging which is vital in today’s hugely FX volatility markets.
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