How to Shine in FX Risk Management

It´s quarter end. Volatility in emerging markets was higher than expected, and although the treasurer has hedged currency risk thoroughly, there is a significant loss in the books. He is summoned to the CFO to comment on the operational shortfall.

Unfortunately, many treasurers know this situation far too well. As a recent Reval survey of 180 global finance professionals shows, 85 percent of businesses suffer from the impact of FX volatility on revenues and/or cost of goods.

In order to reduce FX volatility, 87 percent of survey respondents choose a centralized approach, aiming to identify and manage exposures on a group level. Applying hedge accounting, treasurers prefer instruments such as FX spots, forwards and swaps to mitigate FX risk.

In general, FX exposure netting is a popular concept. Here, currency positions are not hedged 1:1, but are aggregated first per currency for all business units and then hedged. This way the number of hedges can be reduced, and costs can be saved for the bigger transaction volumes. In order to further increase visibility in FX exposures and make hedging strategies more effective, treasurers turn toward cash flow at risk or value at risk metrics.

Today, most companies acknowledge the need for professional FX exposure management, but execution has to be worked on heavily. Less than 10 percent of finance professionals say their FX workflow is fully automated. Conversely, more than 90 percent of businesses work with broken processes, manual workarounds and, consequently, time lags, potentially leading to wrong decisions and economic damages.

Still many companies manage derivatives with spreadsheets. In addition to operational risk, the lack of timely data makes this kind of tool inappropriate for proactive FX exposure management. Modern treasury technology, in contrast, helps to identify and manage enterprise-wide risks in an automated and efficient way.

Leveraging Software-as-a-Service (SaaS) solutions for Treasury and Risk Management (TRM), treasurers are able to manage all risk positions and hedges in a single solution. Working with one system also makes it easy to provide reports, key figures, hedge documentation or sensitivity analyses for strategic decision-making and compliance with regional and international accounting standards. In addition, market data feeds are provided within the SaaS TRM solution for valuations and effectiveness tests. And last but not least, integrated online trading and confirmation matching platforms enable end-to-end automation of the FX workflow.

Independently from a company´s approach to FX exposure management, modern technology enables treasury to better understand risk correlations, hedge more effectively, reduce P&L volatility and communicate to the CFO with strategic analysis and reports.