Tackling the Challenge of Embedded Derivatives

by Danne Buchanan, Executive Vice President, Head of North America Operations, D+H

For multinational corporations selling in multiple currencies, the recent strengthening of the US dollar has turned embedded derivatives from a minor consideration into a material issue. To account for and report on embedded derivatives, most corporations have to date applied a ‘rear view’ perspective, identifying and classifying them at the back end of the receivables process rather than up-front. But by automating receivables and capturing them in a centralised hub, organisations can gain 100% real-time visibility into embedded derivatives – thus dramatically reducing the associated risks, while simultaneously realising wider benefits ranging from a higher rate of straight-through processing (STP) to improved working capital.

Surge in US dollar value

In March 2015, it was reported that the US dollar was undergoing its “fastest rise in four decades” [1] – a climb accelerated by the US economy’s increasingly robust recovery and a weakening of the euro. For multinational corporations conducting transactions across different currency zones, the strengthening of the dollar’s international value – as illustrated in Figure 1 – represents a significant shift in the business environment.

   Click image to enlarge

Download our Free Treasury App for mobile and tablet to read articles – no log in required.

Download Version Download Version