How Corporations Meet Today’s FX Market Challenges
by Hennie de Klerk, CFO, TreasuryOne
Corporate treasurers and CFOs everywhere are confronted with the seemingly endless volatility and uncertainty that afflicts the global foreign exchange market. The weakness of the commodity sector, the general collapse of equity markets and the lack of clarity about the timing and scope of the next moves of influential international authorities such as the Federal Reserve Bank and the European Central Bank add to the confusion and promise no early respite. Treasurers and CFOs are tasked with protecting the value of their companies’ foreign profits, earnings, and investments – and this task has never been more demanding than it is today.
Companies and corporations which are engaged in global commercial operations are naturally exposed to FX market fluctuations, impacting export-based revenues, import costs, and the value of overseas business and financial investments.
Measuring these exposures can be a demanding technical exercise, perhaps involving the management of large and complex arrays of foreign currency bank accounts, committed future payable and receivable flows, and the most uncertain projected flows based on future sales, investments, and expenditures. Analysing these exposures requires sophisticated data management tools, to produce dependable reporting, and the identification of viable and effective hedging strategies to mitigate the underlying risk. Finally, the hedging programme should be executed by professionals whose market expertise enables them to plan and perform the required market interventions at the best available rates, in compliance with the organisation’s financial risk management policy.
These complex requirements need a combination of several different kinds of expertise, plus robust and effective technology support to produce dependable consistent best practice results. For many cost-conscious finance organisations, the continuing challenge is to fulfil foreign revenue and investment value protection within overall budgetary constraints.
This article outlines some of today’s corporate treasury tools which provide practical help to meet these objectives.
FX risk management – technology overview
Technology underpins effective FX risk management through the provision of effective communications, process management, and analytical tools which can liberate financial professionals from the need to struggle with data processing operations, and from working with inaccurate data.
Today’s treasury technology can take care of complex issues such as managing the reporting of accounts from a network of diverse international banks, dealing accurately with different message formats and security and communications protocols. In contrast, spreadsheets lack the robustness and dependability demanded by contemporary audit standards to manage high-value financial functions such as treasury. Treasury management systems (TMSs) provide the core functionality for defining and managing controlled and transparent treasury management operations, and for providing FX risk management decision support.
Modern TMSs take advantage of technical advances such as Software as a Service (SaaS) and web-based technology outsourcing to deliver cost-competitive solutions which take advantage of the economies of scale based on technical resource sharing and centralised service provision. Treasuries can enjoy cost-effective technology services for daily processing, reporting, and risk analysis without the burdens of managing hardware, software and communications.
FX exposure measurement – the cash position
The automated cash position is derived by collecting the up-to-date balances from a global network of multi-currency bank accounts. This information is consolidated into an accurate real-time cash position, with all natural offsets applied. In addition to providing treasury with the basis for effective cash mobilisation, it reveals the core FX exposure situation across the organisation.
Also, integration with the company’s ERP and accounting system enables the reported FX exposure position to be adjusted to reflect all committed foreign currency payable and receivable flows, broadening the analysis.