According to a Treasury Strategies survey, the top four challenges in managing FX exposure are quantifying exposures, gaining confidence in the data, timeliness of data and a lack of automated processes. While some companies may try to meet these challenges using there ERP system, it’s often better to use a company like FX exposure management FiREapps, which is solely focused on addressing these issues.
Regardless of the hedging program or strategy a company employs, FiREapps’ solution can provide support by feeding treasury with the “right” data (exposure validation) for use in decision-making. Customized graphics allow you to see all currencies and the P/L account they are coming from, by currency pair, entity, etc. Multidimensional graphing allows users to “maneuver your way around the data” and “confidence in data allows you to build your hedge program,” members of the FiREapps team explained at a session it sponsored at a spring meeting of the NeuGroup FX Managers’ Peer Group.
Other highlights of the session included:
Go holistic to increase FX predictability. The premise of FiREapps’ approach is to take a very holistic view and think in terms of managing the full portfolio of a company’s exposures (this echoes a sentiment made the former FXMPG2 member to first look at the exposures facing the entire company as if it were one entity). Then, strive to fully understand and quantify them. Once that is done, look for natural offsets to eliminate exposures organically and aggregate and net trades to reduce the cost of hedging. Finally, optimize the risk/return on external hedges.
Reduce hedging with offsets, organic hedging. Organic hedging is an emerging trend, FiREapps said and it is based on a full understanding of the company’s exposures and, before any hedge transactions are undertaken, finding ways to eliminate them with natural offsets like asset-liability matching (via spot trades, if necessary), transfer-pricing policy, classification of intercompany items, and cash-pooling arrangements. These transactions need to be monitored on an ongoing basis through exposure analytics, using an application such as FiREapps, while keeping business and policy changes in mind. Corey noted that Yahoo is a company that relies heavily on natural hedging.
Reduce hedging with trade aggregation. Trade aggregation reduces the number and notional amount of external hedge trades. If needed or desired for accounting allocations, etc., some companies do back-to-back trades internally to the relevant entity. One member for instance executes one large trade and then does back-to-back trades internally. FiREapps allows this process to be automated, with reporting capabilities for example by entity or in the aggregate.
Optimize the hedge strategy: reduce risk at lower cost. FiREapps showed members its patented analytic technique CoRE™ which identifies and communicates the most efficient strategy for reducing currency risk on a company’s financial statements. It produces an efficient-frontier graph illustrating risk reduction (VaR) and the expense (or income) from interest rate differentials, allowing hedgers to decide on an optimal strategy based on where you want to be on the curve. FiREapps provided a case study summary in the presentation and additional case studies have been posted on the website.
Times of high volatility highlight over- or under-hedging in financial statements which consequently shines a light on the underlying exposure analytics. This increases the premium on accurate exposure identification and forecasting and any and all tools and methods to improve performance on this frequently cited challenge are welcome. While some have found a way of leveraging their ERPs to produce such reporting, others find that vendors like FiREapps get them there faster.