FXbeacon: Swim, Bike, Run, Hedge

The three sports of triathlons are swimming, biking, and running – in that order. Each discipline separately, is a challenge of its own and many people spend their whole lives enjoying the pursuit of a single sport.  However, putting them all together into one race and successfully completing a triathlon requires:

• assessing your current physical capabilities and goals
• implementing a training schedule that includes nutrition
• constant evaluation of what is or isn’t working and where improvements can be made

I’ve enjoyed training for and competing in a few races and the old Navy Seal philosophy of, “Slow is Smooth and Smooth is Fast” is what I try to keep top of mind – breathe, keep to the fundamentals and form, don’t rush, and race MY race.

Doing Business Internationally Is a Marathon, Not a Sprint

GPS surveyed more than 200 CFOs and Treasury Professionals from global companies asking which project they were hoping to start, improve, or automate with regards to their exposure to foreign exchange (FX) risk.  The results found that nearly 40% are interested in Cash Flow Hedging programs, while 32% said they will begin to assess or improve the assessment of their FX risk.  Being a global company means your sales, costs, and investments will be impacted by the ever-changing nature of foreign currency values.  How companies approach this inherent risk can mean the difference between success and some other alternative that the board or management doesn’t deem as a success.  Given the survey results, let’s take a closer look how companies can create a successful FX risk management program.  Keep in mind, “Slow is Smooth and Smooth is Fast.”

Assess

The first step in the process is to determine your current FX risk by assessing the following:

• How well can you forecast?
• How easily can you access your ERP data?
• What are your goals?
• Is it Transactional, Translational, or Economical?

• Where does it fall on the timeline?
• What is the Value at Risk (VaR) or Cash Flow at Risk (CFaR)?
• Are there any netting opportunities or natural hedges?
• What are the time horizons of the exposures?
• Where/How will the FX be managed – at the entity level, regionally, globally, or hybrid?
• Will there be a need for Hedge Accounting?

Implement

Your organization’s FX risk management strategy should be based on the insights garnered by your assessment as well as your company’s FX risk management objectives, and should address the following:

• Define a company’s FX Policy
• What is your Credit Capacity, and will you need to provide any collateral?
• Will an ISDA Master Agreement be needed or not?
• Does your company have an active LEI (Legal Entity Identifier) registration?
• Strategies: Static, Rolling, or Layered (Weekly, Monthly, Quarterly, Yearly)
• Instruments: Forwards, Options or Currency Swaps

Evaluate

During triathlon training I evaluate my training performance on a weekly, and sometimes daily basis. I can adjust my workouts, nutrition, and sleep schedules based on many factors including family commitments, work meetings, how well I slept, and my body pain or fatigue to name a few. Also, training with a coach helps you be accountable, provides real-time analysis and feedback, encourages you when you are down, celebrates your victories and becomes a trusted advisor and friend.

According to our survey, 61% believe monthly evaluation of a hedging program should be the standard. Evaluating how effective a hedging program performs is not, “one-size fits all.” Companies have different goals and objectives, corporate structures, risk profiles, intercompany arrangements and data/IT/accounting resources. However, there are some basic methods of evaluating: stress test with “what if” scenarios that include Sensitivity Analysis, comparing Actuals vs. Forecasts, measuring Earnings at Risk and adjusting CFaR or VaR to name a few.

GPS Is Your Coach

The world’s most elite athletic performers all have coaches, shouldn’t you? Global Finance Magazine honored GPS Capital Markets, LLC this past week with the award for, “Best System for Assessing Risk and Hedging Strategy.”

For more than 20 years, GPS has provided an end-to-end FX solution for corporations. We understand the challenges and nuances of operating in different currencies and the financial impact, positive and negative, they can have. When you choose to work with GPS, you get an award-winning, cloud-based platform alongside a team of FX Advisors, Data Scientists, Traders, Accountants and Experience Managers to provide you a white-glove level of service and expertise as we solve your FX problems. Integrity, Experience, and Service are the core principles we use to meet and exceed our clients’ needs.

As the old saying goes, “Tough times never last, but tough people do.” On any given race day, just as in your business operations, there are going to be tailwinds and headwinds. Our clients are tough financial leaders who can weather uncertainties. They’ve positioned their companies to perform at a high level. Are you ready to challenge yourself?