How to use pricing to create an effective hedging program

12-12-2022 | treasuryXL | Kantox | LinkedIn |

In this article, we explore the links between pricing and creating an effective currency hedging strategy. We reveal how a simple PEG framework —Pricing, Exposure, Goals— can allow CFOs and treasurers to correctly define their FX goals, the type of exposure they need to collect and process, and the best hedging program for their business.

Pricing as a hedging mechanism

Transactional currency risk, it is often said, occurs between the moment an FX-denominated transaction is agreed upon and the moment it is settled in cash.

That’s OK, but what if the transaction was priced well before it was agreed, which is a realistic description of how things really work?

That’s why at Kantox, we developed the concept of pricing risk. pricing risk is the risk that between the moment an FX-driven price is set and the moment a transaction is agreed upon, a shift in the FX rate might impact budgeted profit margins.

Closely related to this is the idea that pricing is itself a hedging mechanism. Why? Because you can remove pricing risk by frequently updating your prices.

And that brings us to the topic of pricing parameters and hedging. 

Dynamic pricing

Let us start with dynamic pricing. There is a growing list of industries where dynamic pricing is becoming the norm: travel, chemical traders, hospitality, railways, entertainment, insurance, online advertisement, retail and even shipping.

This trend reflects the fall in transaction costs made possible by the availability of real-time data and the rise of geolocation services and payment apps.

Meanwhile, algorithms take into account supply and demand conditions, competitor pricing and other variables.

Two things need to be considered when it comes to dynamic pricing:

(a) prices are ‘FX-driven’; that is, an FX rate is systematically part of the pricing formula;

(b) prices are frequently updated, therefore leveraging the full capacity of pricing to act as a hedging mechanism. 

Other pricing models

Despite its growing popularity, dynamic pricing is not the only pricing mechanism out there. We can single out at least two other very significant models: 

1. Steady prices for individual campaigns/periods. Some businesses, like catalogue-based tour operators, keep prices stable for an entire campaign/budget period and set new prices at the start of the following period. Things to consider here:

(a) Prices are also FX-driven, just like in dynamic pricing.

(b) The pricing impact of the ‘cliff’, or a sharp FX rate fluctuation between two campaign/budget periods, is fully passed on to customers at the onset of a new period. Here too, pricing acts as a hedging mechanism, but not to the extent it does in dynamic pricing.

2. Steady prices for a set of campaigns/periods. Some firms need or simply desire to keep prices steady not only for one individual campaign/budget period but for a set of campaign/budget periods linked together. Things to consider:

(a) Prices are not FX-driven: the FX rate plays no role in pricing;

(b) The pricing impact of the ‘cliff’ cannot be passed on to customers at the onset of a new period. Pricing, quite obviously, is not a hedging mechanism in this case.

Putting it all together: the PEG framework: Pricing-Exposure-Goals

The PEG or Pricing – Exposure – Goals framework provides actionable clarity when discussing pricing and currency hedging in the context of cash flow hedging programs:

For firms with frequently updated FX-driven prices, the goal is to protect the dynamic pricing rate in all their transactions. The exposure to hedge is the company’s firm sales/purchase orders. The right program is a micro-hedging program for firm commitments.

For companies that keep steady prices during individual campaign/budget periods, the goal is to protect the campaign/budget rate. The exposure to hedge is the forecasted revenues and expenditures for that particular campaign. The right program is a combination of a static hedging program, conditional orders and a micro-hedging program for firm commitments. 

Finally, for firms that keep steady prices across a set of campaign/budget periods linked together, the goal is to smooth out the hedge rate over time. The exposure to hedge is a rolling forecast for a set of periods linked together. The right program is a layered hedging program. 

Currency Management Automation solutions allow you to reach all your goals, whatever the pricing parameters of your business.

What are BIC/ SWIFT codes, how do you find them, and how do they work?

Our guide will let you know about SWIFT and BIC codes inside and out, also for 2023!

To send or receive money internationally, your bank or any other financial institution must know where to send the money – but how do they know? Make way, for this is where a BIC/ SWIFT code comes into the scene! If you’ve ever initiated a money transfer with Xe or read our guide to sending money, you might’ve seen that you’ll need a BIC or SWIFT code. But what is that, and where would you find it?

Starting from what a SWIFT/ BIC code is and why you need it to how you can find it easily and use it for transferring money globally, our guide will let you know everything about this code inside out. Ready, get set, go!

What is a BIC or SWIFT Code?

BIC stands for Bank Identification Code, and SWIFT stands for the Society for Worldwide Interbank Financial Telecommunications. Sometimes, people use the terms “BIC” and “SWIFT” interchangeably. A SWIFT code or SWIFT ID typically identifies banks and other financial institutions worldwide, for international transactions. More specifically, it says who and where these institutions are, so that your money goes to the correct place – you might even think of it as a global identity card for banks.

The International Organization for Standardization (ISO) recognizes and approves SWIFT codes for financial and non-financial institutions. Right now, there are over 40,000 live SWIFT codes in the world.

 

Read now: Top 3 Questions about Forex Answered


What does a BIC/ SWIFT code look like?

SWIFT/ BIC codes contain 8-11 characters that identify your city, country, bank, and the branch of your bank. The code may look something like this: AAAABBCCXXX

All muddled up? Let’s get this BIC format straight:

  • AAAA: 4-letter bank code that’s usually a shortened version of your bank’s name.

  • BB: 2-letter country code that represents the country in which the bank’s located.

  • CC: 2-character location code, pointing to the place where the bank’s head office is situated. It’s made up of letters and numbers.

  • XXX: 3-digit branch code that specifies a particular branch of the bank, usually the bank’s headquarters. These last 3 digits are optional, though.

To help you understand better, we’ve listed out the BIC/ SWIFT codes for a few large banks from around the world:

  • Scotiabank (Canada): NOSCCATTXXX

  • Charles Schwab Bank (US): CSCHUS6SXXX

  • Bank of England: BKENGB2LXXX

  • State Bank of India: SBININBBXXX

Why do I need a BIC/ SWIFT code?

If you want to send money around the world, you’ll almost always need to use a SWIFT/ BIC code. That’s because money transfers technically don’t actually transfer money around the world. Banks securely transmit information to one another through the SWIFT system or their other channels, which lets them know where the money should come from (which account should be debited), and which account should be credited with the money. In short, without this code, your bank won’t know where exactly they should send your money to.

So, it’s important for a bank on one side of the world to find the right bank on the other side, when it comes to international wire transfers, even when you use an international money transfer app like Xe, you’ll have to enter the BIC/ SWIFT code of the recipient’s bank for wiring money to the recipient, because the money will travel from your bank account to your recipient’s bank account.

How do I find my SWIFT/ BIC code?

You can find your SWIFT/ BIC codes with a few options:

  • Check the bank statements

You can usually find your bank’s BIC/ SWIFT code in your bank account statements. If you’re using an online bank, log into your digital bank account to easily view your bank statement.

  • Check the bank’s official website

Visit the bank’s website and check their Frequently Asked Questions (FAQs) section, international wire transfers, and other related links for their BIC/ SWIFT code. If there’s a search feature on the website, enter “SWIFT code” in the search box.

  • Contact your bank

In case you still can’t find the BIC/ SWIFT code, reach out to your bank via live chat, phone, social media, or email.

How do I verify a SWIFT code?

When sending or receiving money, always cross-check the BIC/ SWIFT code and other details with the recipient or your bank before you or the sender sends the money.

But why should you cross-check it?

As a matter of fact, if you enter a SWIFT code that doesn’t exist, the bank should reverse the payment you’ve made, and return your money. They’ll be charging a specific fee for that, though, and it might take some time before you get your money back.

As soon as it hits you that you’ve entered the wrong code to send money internationally (uh-oh), get in touch with your bank right away. They may be able to cancel the transaction, so keep your fingers crossed.

You can avoid such a scenario if you make sure that the BIC/ SWIFT code has:

  • No typing mistakes

You might think entering a SWIFT code is the work of a moment. But when you finally type it, character by character, it might seem as long as a marathon. Since it’s easy to make a mistake while typing in the code, try to copy and paste the code whenever possible.

  • The correct format

Always stick to the format of the BIC/ SWIFT code that the recipient has given you. For example, don’t type the country code before entering the bank code. And remember, there shouldn’t be any spaces between the characters in the code.

How do I transfer money using a SWIFT code via money transfer apps?

Once you sign up on online money transfer apps like Xe, you need to link your bank account directly to the app. After that, you can send money straight to the recipient’s bank account through a wire transfer, no matter where in the world he or she may be. You’ll usually have to follow these steps for wiring money between banks via Xe:

  • Log in.

  • Confirm which currencies you’d want to exchange. You can use Xe’s free Currency Converter tool for a quick check on the mid-market rate.

  • Enter the amount you wish to send.

  • Enter the recipient’s name and address.

  • Enter the recipient’s bank details, including the BIC/ SWIFT code and the International Bank Account Number (IBAN) of his or her bank.

  • Choose your payment method and confirm the money transfer.

Is IBAN the same as SWIFT?

No, IBAN and SWIFT are 2 different codes, but both of these do the same job – sending or receiving money. Banks use SWIFT codes to identify bank branches for making international payments. On the other hand, IBAN codes specify individual bank accounts for both domestic and international payments.

  • Do I need an IBAN number or a SWIFT code?

It depends on the country to which you’re sending money. For example, banks in the US, Australia, and New Zealand don’t use IBAN numbers, but they use SWIFT codes for different banking services.  But if you’re wiring money to a country within the Eurozone, you’ll surely need a SWIFT/ BIC code along with an IBAN number.

Is a SWIFT/ BIC code the same as a sort code?

Nope, sort codes aren’t the same as SWIFT codes. Sort codes are 6-digit codes that help British and Irish banks to identify bank branches for domestic payments (payments within a country).

  • Do all banks use BIC/ SWIFT codes?

No, all financial institutions, especially some small banks and credit unions, don’t have SWIFT codes. Instead, these institutions contact banks that do have BIC/ SWIFT codes, and ask them to serve as intermediaries for wiring money. You might also come across some financial institutions that use SWIFT for only a certain number of their branches, and not all of them.

Is a SWIFT code the same for all branches?

It depends on the recipient’s bank. Some banks may have one BIC/ SWIFT code for all their branches, while others have unique SWIFT codes for each of their branches. Plus, since all the branches of a bank may or may not use the SWIFT network, the code usually specifies the bank’s head office or primary office. So, are you ready to make an international money transfer using a BIC/ SWIFT code? Download the Xe app or sign up today!

 

Get in touch with XE.com

About XE.com

XE can help safeguard your profit margins and improve cashflow through quantifying the FX risk you face and implementing unique strategies to mitigate it. XE Business Solutions provides a comprehensive range of currency services and products to help businesses access competitive rates with greater control.

Deciding when to make an international payment and at what rate can be critical. XE Business Solutions work with businesses to protect bottom-line from exchange rate fluctuations, while the currency experts and risk management specialists act as eyes and ears in the market to protect your profits from the world’s volatile currency markets.

Your company money is safe with XE, their NASDAQ listed parent company, Euronet Worldwide Inc., has a multi billion-dollar market capitalization, and an investment grade credit rating. With offices in the UK, Canada, Europe, APAC and North America they have a truly global coverage.

Are you curious to know more about XE?
Maurits Houthoff, senior business development manager at XE.com, is always in for a cup of coffee, mail or call to provide you detailed information.

 

 

Visit XE.com

Visit XE partner page

 

 

 

Why you need to automate swap execution

22-11-2022 | treasuryXL | Kantox | LinkedIn |

Do you struggle with having a perfect match between your currency hedging position and the cash settlement of the underlying commercial exposure? We’ll let you in on a secret: most treasurers and finance teams do. But how can you simplify this time-consuming and resource-intensive task? In this article, we show why you need to automate swap execution and how you can do it.

We reveal why this is an essential issue for treasurers, how it’s typically handled, and why automated swap execution can help finance teams play a more strategic role in the business. 

Setting the scene

Treasurers know that it is practically impossible to have a perfect match between the firm’s currency hedging position and the cash settlement of the underlying commercial exposure. That’s especially the case if those hedges were taken long before. This is why swapping is so essential.

Let us briefly see an example. If you have a ‘long’ USD forward position with a given value date and you need, say, 10% of that amount in cash right now, a swap agreement allows you to perform that adjustment.

With the ‘near leg’ of the swap, you buy the required amount of USD in the spot market while simultaneously selling —with the ‘far leg’ of the swap— the same amount of USD at the value date of the forward contract. And that’s how you adjust your firm’s hedging position.

Pain points: a resource-intensive activity

Swapping can be extremely time-consuming and resource-intensive, particularly if many transactions, currencies and liquidity providers are involved. We recently saw how a large European food producer was struggling mightily with manual swap execution, a dreadful situation faced by many, if not most, companies.

Among the most common pain points, we can cite the following three:

  • Operational risk. Many tasks are manually executed: retrieving incoming payments, selecting liquidity providers and confirming trades. The entire workflow relies on emails that circulate back and forth with spreadsheets carrying potential data input errors, copy & paste errors, formatting errors, and formula errors.
  • Lack of traceability. Lack of proper traceability hinders the process of assessing hedging performance, as swap legs are manually traced back to the corresponding forward contracts.
  • Risk of unethical behaviour. Understood as the risk that early mistakes that are not immediately reported may lead to severe losses down the road, it is prevalent throughout.

Traceability and automated swap execution

Traceability is when each element along the journey from FX-denominated entry to position to operation to payment has its own unique reference number. But how can we apply this concept to solve the problem of manual swap execution?

The answer is automated swap execution, a solution that is embedded in Currency Management Automation software. It relies on the perfect end-to-end traceability between the different ‘legs’ of a swap agreement and the original forward contract. Meanwhile, FX gains/losses and swap points are automatically calculated. It’s dead simple!

Swap automation is a powerful tool for the treasury team. At the company level, it opens the way to:

  • According to recent surveys, increasing the efficiency of treasury operations is the No. 1 expectation in tech for CFOs.
  • Using more currencies in the business to take advantage of the profit-margin enhancing possibilities of ‘embracing currencies’.
  • Taking a concrete step toward the ‘digital treasury’ is a concern voiced by many CFOs and treasurers.

At a personal level, in terms of the daily workload of members of the treasury team, automated swap execution means:

  • More time to concentrate on high-value-adding tasks such as fine-tuning and improving cash flow forecasts.
  • Reduced stress levels.
  • Increased productivity at work.

And that’s no small achievement! 

What’s the difference between a neobank and a challenger bank?

19-11-2020 | treasuryXL | XE |

The biggest difference between neobanks and challenger banks is the presence or absence of a banking license, but it’s not the only difference.

Most banks began looking into online services shortly after 9/11 brought air travel to a sudden and screeching halt. They wanted a way to move money which did not involve placing paper checks on airplanes. Internet-based banking, or mostly internet-based banking, was the next logical step. According to some recent market research, neobanks and challenger banks will be worth over $470 billion USD by 2027. Frequently, people use these terms interchangeably. However, there are some significant differences between neobanks and challenger banks. Challenger banks are mostly online, and neobanks are exclusively online.

Neobank vs Challenger bank

But while the presence of physical locations (and lack thereof) is an important distinction between neobanks and challenger banks, it isn’t the only difference between the two bank types. There are several differences to note, as these differences often have a direct bearing on which one is best for your family or business.

Difference #1: physical presence

Think of it like this. Many retailers, like Walmart, have both a physical and an online presence. Other retailers, like Amazon, are exclusively online. Challenger banks and neobanks are basically the same. But the Walmart comparison only goes so far. Most challenger banks only have a handful of physical locations, as their online services are their main draw. Furthermore, most of these physical locations are in the UK. After the 2008 financial crisis, the government opened the market to new banks.

Neobanks, on the other hand, first appeared in 2017 as a way to fill the niche between traditional banks and FinTechs. Less than four years later, there are hundreds of these institutions in the UK, U.S., and worldwide.

Difference #2: accounts, products, and services

There are some other differences as well. Typically, challenger banks offer both personal and business accounts. Moreover, challenger banks streamline their products and services, so they can be more internet-friendly. Challenger banks are small institutions which “challenged” the Big Four UK banks (Barclay’s, Lloyd’s, HSBC, and RBS). Their technology-based services and commitment to markets traditionally under served by the Big Four quickly attracted legions of customers.

While neobanks do offer some personal accounts and services, they usually target small and medium-sized businesses (SMEs) and business startups. They present themselves not just as banks, but as online financial technology firms, and typically appeal to more tech-savvy customers.

Difference #3: banking license

What’s the difference between a psychiatrist and a psychologist? It’s not their sense of humor, or lack thereof. Psychiatrists can prescribe medication, and psychologists can only provide therapy.

That’s also the major difference between challenger banks and neobanks. Most challenger banks have such a limited physical presence that they are essentially 100 percent online. But challenger banks have banking licenses and neobanks do not. So, only challenger banks can offer a full range of financial services. That includes things like issuing credit cards and loaning money. Neobanks can offer these services as well, but only if they are tied to a licensed institution.

There is some overlap. Many neobanks essentially began as FinTechs. Then, once regulators approved their banking license requests, they became challenger banks.

Some examples of top challenger banks and top neobanks

Formed in 1995, Richard Branson’s Virgin Money is one of the oldest challenger banks in the UK. It also has locations in Australia and South Africa. Between 2007 and 2010, Virgin Money also operated in the U.S. A private equity group began Aldermore in 2009. The online institution bought Ruffler Bank a few months later, so the neobank became a challenger bank almost overnight. Aldermore is also the poster boy of this sector’s growth. South African financial conglomerate FirstRand recently bought Aldermore for a staggering £1.1 billion.

Durham, England’s Atom Bank was the UK’s first online financial institution to tailor its platform to tablets and smartphones, as opposed to PCs. It was also the first 100 percent digital bank to receive a banking license. Shortly thereafter, international banking giant BBVA acquired a large stake in Atom Bank. As a result, it expanded its financial services to include residential mortgages, competitive savings accounts, and secured business loans.

Founded in 1996, First Internet Bancorp was one of the first FDIC-insured, state-chartered financial institutions in the United States with a 100 percent online presence. It mostly offers retail services, like checking accounts, and securities investments. Customers also have access to installment loans, personal lines of credit, and other financial services. Chetwood Financial Services is an example of a limited challenger bank. It offers most financial services, with the exception of residential mortgages. Regulators do not allow CFS to issue any buy-to-let residential mortgages. Civilised Bank, which is now known as Allicia Bank, is in the same boat. It offers a single financial product, a twelve-month savings account, by virtue of a limited Part 4a UK license.

In 2010, General Motors Assurance Corporation, GM’s financing arm and a free-standing financial services company, became Ally Financial. Not surprisingly, Ally focuses on auto leasing and financing. It has close to five million such customers. In 2016 and again in 2019, the company significantly expanded its mortgage lending business. Ally is affiliated with Via, an online vehicle auction site.

San Francisco-based Good Money sends half its profits to social justice and environmental preservation groups. Accountholders cast ballots to decide where Good Money invests. The bank offers a range of FDIC-insured products, mostly DDA checking and savings accounts. As of January 2019, there was a waiting list to be a Good Money customer. All new customers also have the option of purchasing a stake in the company. Credit Suisse X is the online arm of the venerable Zurich-based investment bank. Its online banking services are targeted to individuals with high incomes. Online financial institutions are more able to go after specific market segments.

Use Xe to make international money transfers

Neobanks and challenger banks are good options for customers who want an all-online or mostly-online experience. But they are not a very good option for international money transfers. Traditionally, bank fees are rather high in this area, and you may not get the best exchange rates for your transfers.

Money transfer providers, such as XE, are neither neobanks nor challenger banks. Xe does not try to be all things to all people. Instead, we focus on electronic funds transfers in general, and international electronic funds transfers in particular. We have worked very hard to develop a platform that’s both convenient and secure. As a bonus, we are also able to offer fast money transfers (some taking just a few minutes) and competitive exchange rates.

 

Get in touch with XE.com

About XE.com

XE can help safeguard your profit margins and improve cashflow through quantifying the FX risk you face and implementing unique strategies to mitigate it. XE Business Solutions provides a comprehensive range of currency services and products to help businesses access competitive rates with greater control.

Deciding when to make an international payment and at what rate can be critical. XE Business Solutions work with businesses to protect bottom-line from exchange rate fluctuations, while the currency experts and risk management specialists act as eyes and ears in the market to protect your profits from the world’s volatile currency markets.

Your company money is safe with XE, their NASDAQ listed parent company, Euronet Worldwide Inc., has a multi billion-dollar market capitalization, and an investment grade credit rating. With offices in the UK, Canada, Europe, APAC and North America they have a truly global coverage.

Are you curious to know more about XE?
Maurits Houthoff, senior business development manager at XE.com, is always in for a cup of coffee, mail or call to provide you detailed information.

 

 

Visit XE.com

Visit XE partner page

 

 

What is meant when we read or hear about Volatility?

09-11-2022 | Harry Mills | treasuryXL | LinkedIn

We all have an intuitive feel for what volatility is – we know when a market is exhibiting high or low volatility because we see differences in price changes. But it pays to be more precise with our language and to understand what is meant when we read or hear about volatility.

By Harry Mills

Source

Defining Volatility

Let’s start with a more instinctual and accessible definition:

Volatility is the rate at which prices change from one day to the next. If some currencies or other financial assets routinely exhibit greater daily price changes than others, they are considered more volatile.

Harry Mills, Founder & CEO Oku Markets

In his preeminent book, Option Volatility & Pricing, Sheldon Natenberg refers to volatility as “a measure of the speed of the market,” which is a particularly useful reference point when we consider that volatility and directionality are two different things: an underlying’s price can slowly move in one direction over time with very low volatility, or perhaps it swings wildly from day to day, but over a year it’s not changed much.

Now we have a feel for what volatility is, how do we quantify it? This third definition explains what it actually is: the annualised standard deviation of returns, and Natenberg refers to volatility as “just a trader’s term for standard deviation.”

This isn’t an article on standard deviation per se, but if you’re unaware of what this means then it is a measure of the dispersion of data around the average. Take for example if we measure the height of 1,000 people:

  • If all 1,000 people are exactly 5’7″ then standard deviation is zero
  • If standard deviation is two inches, then we know that 68.2% of people will be between 5’5″ and 5’9″ (see the normal distribution chart below)
Normal Distribution chart (Wikipedia)
Normal Distribution chart (Wikipedia)

What about “annualised” and “returns”?

Volatility is always expressed as an annualised number – this uniformity means that everybody knows what is meant when we talk about volatility being X%. In that sense, it’s rather like interest rates, which are also always described as an annualised figure.

This might not be so immediately useful to a trader or a risk manager, though, who might be thinking of daily or weekly price movements and where their risk or opportunities lie. Volatility is proportional to the square root of time, so to convert annualised volatility into daily, we simply divide the volatility by the square root of the number of days in a year – but we need trading days – on average there are 252, equating to 21 trading days a month. The square root of 252 is 15.87, but most traders approximate this to 16…

Hence, if we have a contract trading at 100 with a standard deviation of 20%, then: 20%/16 = 1.25%. We would therefore expect to see a price change of 1.25% or less for every two days out of three (+/- 1 standard deviation is around 68%).

Returns… I won’t go into detail, but if you want to explore this I would recommend chapter 10.6, The Behaviour of Financial Prices, in Lawrence Glitz’s superb Handbook of Financial Engineering which explains how price returns follow a normal distribution and prices follow a lognormal distribution. I’ll also add that calculating the standard deviation of prices doesn’t provide meaningful information because what we are looking for is the change from one period to the next, so we need to look at the daily returns!

Still here? Ok… let’s take it down a notch and look at the types and uses of volatility

Types of Volatility

There are a few types of volatility that can be measured, but by far the most commonly used and referred to are historical and implied volatility:

  • Historical volatility is a backward-looking measure that shows how volatile an asset has been over say, a 20-day period. It’s useful to look at different time periods and to chart the daily movement in the volatility.
  • Implied volatility is the future expected volatility – the term ‘implied’ is helpful because it literally means the volatility that is implied by the premium of an option contract. It’s a critical factor that influences options prices and draws the attention of traders and risk managers.

Uses of Volatility as an Indicator

Volatility is a common measure of risk, and it is a key component of Value at Risk modelling. But be warned of the ubiquitous disclaimer that past performance is no guarantee of future results.

Historical volatility is useful to understand how an asset or a currency has performed in the past – you can line this up with significant macroeconomic events and understand why there may have been a period of change, and you can get a feel for how the underlying “normally” behaves. For example, trading in the Turkish lira will probably present a higher risk than in, say the Swiss franc.

Summary

  • Volatility is the rate at which prices change from one day to the next
  • It demonstrates the “speed of the market” and is different from directionality
  • Technically, volatility is the annualised standard deviation of returns
  • You can approximate daily volatility by dividing the annualised volatility by 16
  • Historical volatility tells us what happened in the past
  • Implied volatility is the expectation of future volatility, and critical to option pricing

Thanks for reading!

 

Harry Mills

Founder at Oku Markets

Managing Business FX Risk

Optimising cash and liquidity through currency management

31-10-2022 | treasuryXL | Kantox | LinkedIn |

Can you improve cash and liquidity management with the help of more effective currency management? The answer is: yes, you can! In this article, we see how currency management and cash management are, in effect, joined at the hip.


Five important touchpoints

There are at least five crucial, yet sometimes unduly neglected, touchpoints between FX risk management and cash or liquidity management. Let me briefly set the stage first. Then I will discuss their interactions.

(1) Swapping. Adjusting the company’s hedging position to the cash settlement of the underlying commercial exposure requires a lot of swapping.

(2) Collateral. In a world of shifting interest rates, treasurers need solutions that allow them to optimise collateral management.

(3) Working capital management. Solutions to improve working capital and liquidity are rarely mentioned in the context of FX risk management. Yet, they exist!

(4) Netting. Netting allows companies to generate savings in trading costs and in terms of the cash balances needed to satisfy collateral requirements.

(5) Cash flow forecasting. According to a recent survey by HSBC, more than half of treasurers worldwide say that cash flow forecasting is the most important task in treasury.

How and when currency management meets liquidity management

Take the case of a hedging program designed to protect the FX budget rate. It includes stop-loss orders to protect the FX rate used in pricing or a ‘worst-case scenario’ FX rate. It can also include profit-taking orders to lock in more favourable exchange rates.

As long as the stop-loss orders are not hit, hedge execution is postponed. This means that the cash required for collateral requirements can be set aside at a later date. It also means that treasurers have more time to improve their cash flow forecasts.

And it’s not over yet! Hedging incoming firm sales/purchase orders or invoices leads to very precise currency hedging. This means that purchasing managers are in a position to buy confidently in the currency of their suppliers. These, in turn, will be more inclined to grant extended paying terms.

With the perfect end-to-end traceability that comes with automated programs, managers can safely aggregate exposures without fear of losing the benefits of data granularity. This can create more netting opportunities, again reducing the need to set aside cash in terms of collateral.

Finally, swapping can be easily automated.

And voilà!

Feedback effects

That’s how effective FX risk management ends up improving liquidity management. Note that the process feeds on itself. Let me give you an example. Because swap automation releases valuable treasury resources, treasurers can take advantage of the benefits of using more currencies. Automated swap execution, therefore, improves not only the cash management part of the FX workflow but also —indirectly— working capital management.

That’s what I call a win-win situation!

Brush up on your treasury knowledge? Get our eBook: What is Treasury?

27-10-2022 | treasuryXL | LinkedIn |

How can you fast brush up on your treasury expertise, Treasurers, CFOs, Cash Managers, Controllers, and other Finance Addicts? Or how would you describe “What Treasury is” to family and friends? Well, there is an easy solution for it. Download our free eBook here: What is Treasury?

This eBook compiled by treasury describers all aspects of the treasury function. This comprehensive book covers relevant topics such as Treasury, Corporate Finance, Cash Management, Risk Management, Working Capital Management.

This eBook was prepared by treasuryXL based on the most useful best practices offered by Treasury professionals throughout the previous years. We compiled the most crucial information for you and wrote clear, concise articles about the key topics in the World of Treasury.

We took a deeper dive into each of the above-mentioned treasury functions and highlight:

  • The purpose of each named Treasury function (What is?)
  • What specialists do
  • Examples of Activities
  • Summary of Frequently Asked Questions and answers
  • Conclusion

How to receive the eBook ‘What is Treasury’ for Free?

We simply giveaway two presents for you! By signing up for our newsletter you will automatically receive the following in your inbox:

  1. On Fridays, our Coffee Break weekly newsletter will land in your inbox. In this weekly newsletter, we will highlight the whole week full of the latest treasury news within our community.
  2. The 41 pages eBook, What is Treasury?
Subscribe and Download

 

Subscribe, Join, Download and Relax.

Welcome to our community and have fun reading!

 

 

Kendra Keydeniers

Director, Community & Partners at treasuryXL

 

 

Types of Forward Contract

20-10-2022 | Harry Mills | treasuryXL | LinkedIn

A forward contract is an agreement to buy or sell one currency for another at an agreed rate and at an agreed future date. Forwards are traded over the counter, meaning they are not traded on a central exchange; instead, they are privately negotiated, legally binding agreements between two parties, typically a bank or broker and its client.

By Harry Mills

Source

Types of forward contract

For businesses, forward contracts provide a mechanism to secure exchange rates for future exposures and minimise the impact of currency fluctuations and market volatility. Forwards are favoured by treasurers and FDs/CFOs for their simplicity, availability, flexibility, and certainty they provide.

The exchange rate on a Forward is typically higher or lower than the spot rate – this is due to the interest rate differential of the two currencies involved. Read more in my blog post on forward pricing for more information!

 

The Benefits of Forward Contracts

The decision to hedge or not is unique to each business and its situation. If currency hedging is appropriate and would help a business to reduce risk and achieve its objectives, then forward contracts will likely play an important role in the strategy:

 

  • Certainty – Guarantee the exchange rate for future payments or receipts
  • Predictability – Securing future conversion rates makes cash flows predictable
  • Flexibility – Some contracts can be used at any time before the maturity date
  • Simplicity – Trade quickly online, in any size, and in most currencies

Types of Forward Contract

The basics apply to all contracts – a set amount, rate, and future maturity date, but there are three main types of forward contracts to be aware of:

  1. Fixed: Settlement is restricted to one future date only
  2. Open: Fully flexible, allowing settlement at any time up to the maturity date
  3. Window: Can be utilised within a window of time up to the maturity date

The open forward gives the most flexibility for drawdowns and utilisation, but it can come at a price: The reason that three types of contract are available is that the forward rate is influenced heavily by the length of the contract and the size and sign (positive or negative) of the interest rate differential of the two currencies involved. There could be a benefit to a business in selecting a fixed or window forward contract, rather than a fully flexible, open contract.

A quick example:

  • An Irish company imports from China in USD (so they sell EUR to buy USD)
  • They have an invoice of $500K to pay in 6 months’ time
  • The spot rate is EUR/USD 1.0000, and the 6m swap points are +0.0120
  • Open Forward exchange rate is quoted at 1.0000, $500K costs €500,000
  • Fixed Forward exchange rate is quoted at 1.0120, $500K costs €494,071

 

If in doubt, you should speak to your FX provider about forward pricing and which solution would be best for your needs, balancing flexibility and market pricing.

What to look for from your FX provider

Your currency provider should provide you with clear and consistent pricing for forward contracts. They should give you transparent and honest guidance as to the pros and cons of each contract type, and allow you transact how you want, whether that’s over the phone or online.

It’s common for FX brokers to overcharge or “keep” forward points to increase spreads (their margins), so ask for a fixed pricing schedule which includes transparency on forward points.

Open Fwd-va9lk

Window Fwd-tw7b7

Forward with Oku Markets

Oku Markets provides live forward contract trading to clients online and via our telephone dealing desk. We always give our customers fixed, consistent, fair, and transparent FX prices, so you can trust us to work with you, not against you!

Contact us at @[email protected]   or 0203 838 0250 to discuss your needs!

Here’s a quick video of our online platform showing the few clicks to trade:

Thanks for reading 👋

 

Harry Mills

Founder at Oku Markets

Managing Business FX Risk

BNP Paribas signs an agreement for the acquisition of Kantox

17-10-2022 | treasuryXL | Kantox | LinkedIn |

treasuryXL congratulates highly valued partner Kantox with the announcement that BNP Paribas has signed an agreement to acquire the leading fintech for automation of currency risk management!

Source

Kantox, a leading fintech for automation of currency risk management, will accelerate its growth with the support of BNP Paribas and the strengths of its integrated business model. This acquisition builds on the initial strategic partnership between BNP Paribas and Kantox initiated in September 2019.

BNP Paribas is pleased to announce the signature of an agreement for the acquisition of Kantox, a leading fintech for the automation of currency risk management. Kantox’s software solution has managed to successfully re-bundle the Corporate FX workflow, offering a one-stop-shop, API-driven, plug-and-play solution which has emerged as a unique technology within the B2B cross-border payments sector. Kantox’s technology provides an unrivalled level of automation and sophistication to Corporates in setting up hedging strategies.

By leveraging its integrated business model, BNP Paribas is well-positioned to accelerate and extend Kantox’s offering to a wide range of Corporate clients across the globe.

The acquisition of Kantox is supported by the Global Markets business of BNP Paribas’ CIB division and the business centres of the Commercial, Personal and Banking Services (CPBS) division. The two divisions aim to deploy Kantox technology to large corporates as well as SMEs and Mid-Cap clients, capitalising on market knowledge and the local presence of the group.

 

This acquisition illustrates BNP Paribas’ Growth Technology Sustainability 2025 plan that sets out to accelerate the development of technological innovations, enhance customer experience and provide best-in-class capabilities to its clients.

Philippe Gelis, CEO and co-founder at Kantox: “We have been serving clients together since 2019 when our technology partnership started. During those 3 years, we spent a lot of time together in the field, getting the opportunity to understand that together we were stronger and able to bring more value to clients. It is the best of both worlds, the leading software company in the currency management automation category and the leading bank in Europe.”

Olivier Osty, Head of Global Markets, BNP Paribas CIB: “We are delighted to strengthen our partnership with Kantox, which brings to our clients a unique and innovative platform to automate their currency risk management. Corporate treasurers are currently navigating turbulent markets, and advanced technology can help mitigate some of the challenges, easing the burden of manual tasks and allowing them to focus on their core business.” 

Yann Gérardin, Chief Operating Officer, Head of BNP Paribas CIB: “The acquisition of Kantox presents a further illustration of our ability to establish long-term partnerships with fintechs in an ever-increasing range of areas. Supporting our clients in their international development and providing them with the most advanced technological solutions have always been our priority and are, as such key pillars of our GTS 2025 strategic plan.”

Thierry Laborde, Chief Operating Officer, Head of BNP Paribas CPBS: “This acquisition demonstrates how our distinctive model and integrated platform strategy are able to create value and develop business opportunities. Our leading positions with European companies of all sizes will enable Kantox to further accelerate its development while improving our customers’ experience.”

The acquisition is subject to regulatory approvals and is expected to complete in the coming months.

Eurofinance remains THE event for corporate treasurers | By Pieter de Kiewit

12-10-2022  treasuryXL | Pieter de Kiewit | Treasurer Search  LinkedIn

 

Throughout covid times the organizers of Eurofinance remained active and were able to create interesting web-based events. Still, general opinion in last weeks’ event in Vienna was that there is nothing like the live thing. The programme was packed with interesting content, the event floor with interesting companies and visitors.

By Pieter de Kiewit

Communication leading up to the event and the venue, the Wien Messe, radiated experience in events of this size. The numbers of representatives and visitors were impressive. Luckily, the venue is big enough to not nerve the visitors who have to get used to large crowds again.

The programme was spread out over the very large room for plenary meetings, five large rooms for parallel session with presentations & panel discussions and “open rooms” on the trade floor. Key note speakers like Guy Verhofstadt and Goran Carstedt were able to enthuse with stories beyond the scope of treasury, others covered topics about treasury technology, both practical & visionary and treasury organization, for example about my personal favourite, the treasury labour market.

For many, the trade floor was easily as interesting as the content. Visitors gained market information, for example preparing for a TMS selection and implementation. Also reuniting with old treasury friends and getting to know new ones, was relatively easy during well catered breaks. Some of the visitors created new legends during the Thursday night afterparty that is not covered by this looking-back-blog.

As treasuryXL ambassador I visited the various partners of the platform present and received positive feedback on the event. So Cobase, Kyriba, TIS, CashForce, Nomentia, Refinitiv and CashAnalytics, we hope to see you again in Barcelona again and welcome a number of new ones.

 

Hasta luego,

 

 

 

 

 

 

Thanks for reading!

Pieter de Kiewit