FXbeacon: Zen and the Art of FX Risk Management

I like to travel. Experiencing different places and their cultures is a passion for my wife and me. Though we make some restaurant reservations and schedule a few activities, we like to leave room for serendipity. Surprises are encouraged; the best surprises usually become our favorite memories, and the worst surprises almost always become our favorite stories.

In the late 90s, when my hair had frosted tips, my wife and I traveled through Vietnam with some FX trader friends. (At the time, I was a spot trader at a large Dutch bank). We were wandering past a Buddhist temple when a monk invited us inside for tea. I was struck by how strange it was to meet someone 100% comfortable with their place in the world. I felt like a Neanderthal in his presence. Completely at peace, he poured tea and asked us all about our families and our visit to his beautiful country. I like to think we all took something away from our time with him that day. There was a sudden self-awareness, which is rare among FX traders, of how different we all were from this man. We were high-strung, self-absorbed, and ruthlessly materialistic. Collectively, our personal metrics for happiness needed serious improvement. Twenty-five years later, I still remember his face and presence as though it was yesterday. Now, I’m only moderately self-absorbed.

Sixty countries later (I still like bragging about having visited over sixty countries), my wife and I try to have as much unscheduled time as possible. We leave that time hoping for the chance to understand new perspectives, reflect on the sights of the day, or similar journeys of self-discovery. Luckily, if a monk isn’t available to show me my flaws, my wife is more than happy to step in.

This brings me to cash flow hedging. Forecasting a company’s foreign currency revenues and expenses occurring at some future date and putting a value on it. This is the meat and potatoes of FX hedging. The goal is to limit surprises—even the pleasant variety, where a favorable currency movement improves margins. As Treasurer/ CFO – you aren’t getting credit for that. Clearly, the sales team outperformed. Even if recognized for what it is–the executive team will say it’s an example of how you didn’t manage risk appropriately and got lucky. Heads, I win; tails, you lose.

Approximately 2/3 of public companies hedge forecasted foreign currency revenues and expenses (a bit less for private companies). There are a few reasons why more companies do not hedge forecasted cash flows. I have heard a bunch of them. Most often, the reasons given are:

·       “We are unable to forecast our exposure accurately.”

·       “We lack the expertise and resources to hedge effectively.”

·       My favorite is, “Our senior management does not believe in hedging.”

·       “Hedge accounting is too difficult.”

Did I miss one?

GPS has a great solution for addressing all the above challenges.

FXpert, our award-winning (Global Finance – 2023 “Best System for Assessing Risk and Hedging Strategy”) cloud-based platform, allows users at the entity or global level to enter forecasted exposures. It also allows users to compare forecasted vs. actual entries to measure and reconcile the effectiveness of the forecasts to optimize the cash flow hedging program and provide a comprehensive understanding of global flows. FXpert consolidates multiple beneficiaries under a single hedge, reducing transaction costs and simplifying the hedge management process. Next, the platform assigns the correct portion of the hedge to the appropriate entity, ensuring that reporting aligns with regulatory requirements and favorable accounting treatment. If needed, GPS can also provide the hedge accounting package to reduce the workload on your accounting team. I’ve yet to meet a corporate accountant who did not need a reduced workload.

In my experience working with clients across the country, I have found that different geographies have different priorities regarding FX management. Some geographies value straight-through processing above all else. Others place more value on the one-on-one advice provided by someone like me. A considerable benefit of our cloud-based platform is that it gives value to each client.

Additionally, a process-driven platform such as FXpert will institutionalize the forecasting and hedging workflow. It provides an audit trail that your accounting partners will appreciate and provides transparency to FX management. Since it is cloud-based, our clients can authorize users across their finance team so that the knowledge base is not concentrated amongst just one or two individuals.

Cash flow hedging provides a known outcome and helps create more accurate and stable financial statements. With FXpert and the GPS team, your firm can instill transparency and forecasting discipline across global entities while reducing associated transaction costs.

Check out the link below for a short video highlighting our CF hedge module in FXpert. https://youtu.be/6zzO6XJ06d4