Many global organisations lack confidence in the accuracy of their FX exposures. Whether they struggle to gather reliable FX forecasts needed to assess the risk or fail to account for the impact of currency fluctuations, visibility gaps impact financial statements and ultimately profitability.
Looking under the hood, there are often disconnects among people, teams, processes, and technology, obstructing the view of FX risk. Focusing on the following key areas can substantially improve this visibility and advance the organisation’s FX programme.
Understanding the business and aligning stakeholders
Conflicting strategic priorities, performance metrics, or data collection practices between central treasury, subsidiaries and other business divisions can hamper communication and impact data quality.
Organisations can avoid this pitfall by bringing key stakeholders together at the outset of the programme to agree on objectives and KPIs. This also provides opportunities for those involved in managing the process to build relationships across business units that might otherwise have little interaction. This then ensures all teams are advancing toward the same goal and collectively invested in agreed priorities.
Assessing risk and impact
Once the relevant teams are aligned, challenges arise around processes for gathering data and quantifying risk. Gathering exposures is time intensive and difficult, with central treasury pulling information from multiple sources and systems.
Reviewing how the organisation collects data – identifying when and why manual errors occur and where automation can streamline processes – can transform outcomes. Where possible, exposure aggregation technology should be deployed to pull data from ERP systems and consolidate exposures from business units. Often, using historic actual flows is also a good starting point in understanding forecast exposures.
Technology can also improve data accuracy and expose forecast discrepancies, changing business trends or external market shifts. The key is to achieve good visibility on underlying exposures to ensure that the resulting hedging is effective and meeting the stated objectives.
Create an evolving hedging framework
Once the arduous task of gathering the data has been completed, treasury can use analytics to determine the impact of the exposures on the business and determine the optimal hedging strategy. This will enable the team to create a suitable hedge policy with a programme of hedges to be executed on an ongoing basis. The structure and framework for the FX-hedging approach can be formulated and shared with the business units to ensure that alignment continues as the project progresses.
The framework will include programme governance, monitoring, and reporting. Keeping the programme relevant and accurate requires continuously monitoring and adapting it to changing markets while simultaneously informing stakeholders of those impacts. Once the framework is in place, the team should develop the implementation plan, including strategy, execution, sequencing for key workflows, technology support, and associated timing. This includes mapping out clear roles and responsibilities for central treasury and other business units, along with detailed workflow streams for the financial reporting and accounting functions.
Leveraging technology to increase insight and efficiency
Technology can be employed to make elements of the risk quantification and therefore implementation of the hedging programme easier. It can also add rigor and efficiency to hedge decision-making, enabling adaptation to changing markets and swift decision-making.
Workflow and analysis tools can automatically recommend hedges based on pre-defined hedging policy parameters, enabling treasury decision-makers to approve proposed structures and execute hedges via STP.
Technology also enables hedge netting, pooling of exposures, and reducing overall execution costs. Once hedges are executed, automation simplifies the process for managing the transaction life cycle, including valuation and hedge accounting. Business intelligence tools provide a concise overview of the economic and accounting implications of the programme and its performance in achieving the stated KPIs.
To ensure the new or revised risk management programme is well received by stakeholders, treasury should implement a change management plan that outlines the steps for developing, implementing, monitoring, and communicating the FX hedging strategy. This will include both internal and external communication. While the programme may grow and change over time, a best practice FX framework positions the organisation to address FX exposures proactively, delivering increased confidence in the risk mitigation approach and, ultimately, the business’ performance.
Maintaining a cutting-edge FX programme
With objectives defined and processes and controls in place, the treasury team can then quantify the costs and benefits, including the transaction and operational costs of executing and monitoring the programme. Beyond determining whether the strategy is effective in mitigating the risk, this analysis will also identify areas for increased efficiencies and operational improvements to gain better visibility and confident decision-making. At the same time, the programme must have the ability to respond to market opportunities and retain agility to capitalise on these. This will ensure long-term success in the programme and overall business resilience.
While the programme will evolve along with industry and financial markets, a best-practice FX visibility framework enables an organisation to address volatility proactively and systematically, delivering increased confidence in financial statements.
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading adviser and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
