CFO Perspectives: 3 ways CFOs can use currencies to boost their business’s value

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05-07-2022 | treasuryXL | Kantox | LinkedIn |

As a CFO, you are aware of the benefits of FX hedging for treasury. However, are you also aware of the macro-level advantages for your company and its value?

A new CurrencyCast series has just been introduced by Kantox. They examine five ways that efficient currency management may benefit your entire business in the first episode of their CFO Edition miniseries, including how to incorporate it into your strategy and how to decrease cash flow fluctuation. Watch below the video or read the corresponding blog.

Credits: Kantox
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In the first edition of CFO Perspectives, we’ll draw from our work with CFOs to explore three ways senior finance executives can make currency management a winning growth and cost-saving strategy for their business.

Looking at the concerns expressed by CFOs in most risk management surveys, a number of familiar themes seem to reoccur: the importance of cash flow forecasting and monitoring, the centrality of FX risk management and the ongoing digitisation of treasury processes

Yet, this picture is far from complete. 

Ultimately, among the tasks assigned to CFOs, there is the need to make a contribution toward enhancing the value of the business. But what is the role —if any— played by currency management in that regard? Answering this question allows us to single out three strategic contributions of currency management that CFOs should prioritise.

Value and FX hedging: time for a reassessment

Does currency management create value? The traditional view has been ambivalent: a ‘glass half full, half empty’ kind of appraisal. While the benefits of hedging FX have never been in dispute, the problem lies with the perceived high costs of currency management.

This is precisely where things are changing—and quite fast. Digital, API-based technology is putting to rest the notion that currency management is always a costly, resource-intensive task. Meanwhile, Multi-Dealer Platforms (MDPs) such as 360T, embedded in these solutions, sharply reduce trading costs.

CFOs: three strategic contributions of currency management

(1) Create opportunities for growth

Feeling concerned about exchange rate risk, managers may neglect the growth opportunities that come from ‘embracing currencies’. Buying and selling in more currencies allow firms to capture FX markups on the selling side while avoiding markups on the contracting side. Two examples will suffice:

(a) On the selling side: In e-commerce setups, currencies can be leveraged to increase direct, high-margin sales on company websites with many payment methods. Multi-currency pricing is the secret weapon for reducing cart abandonment, which still stands at about 77% globally.

(b) On the buying side: Buying in the currency of their suppliers allows firms to (1) Avoid inflated prices charged by suppliers who seek to manage their own FX risk; (2) Widen the range of potential suppliers by putting them in competition; (3) Obtain extended paying terms.

By taking FX risk out of the picture, currency management enables firms to reap these and other margin-boosting benefits of using more currencies in their day-to-day business operations. Ultimately, it is about removing the disincentives that prevent firms from ‘embracing currencies’.

(2) Provide more informative financial statements

Informative financial statements allow investors to assess the quality of management by removing noise from the process. To the extent that the variability in net income is perceived as a measure of management quality, effective currency hedging creates a sense of discipline in the eyes of investors.

The good news for CFOs is that technology is making great strides in cost-effectively managing the accounting-related aspects of currency management. Here are two examples:

  1. Balance sheet hedging. Automated micro-hedging programs for balance sheet items take the impact of FX gains and losses out of the picture, as invoices are hedged with great precision.
  2. Traceability and Hedge Accounting. The perfect end-to-end traceability made possible by automated solutions eases the costly and time-consuming process of compiling the required documentation for Hedge Accounting.

(3) Lower the cost of capital

Companies can reduce cash flow variability thanks to a family of automated hedging programs and combinations of hedging programs, including layered hedging programs that make it possible to maintain steady prices in the face of adverse currency fluctuations.

In challenging times, when the availability of external financing at a reasonable cost is scarce —an all too common occurrence in years of pandemics and wars—reduced cash flow variability makes it possible for companies to execute their business plans and meet all cash commitments.

An impaired capacity to raise financing has implications in terms of valuation, especially for smaller businesses. This ‘cost’ has been variously measured, with some estimations ranging from 20% to 40% of firm value. Currency management enhances the capacity to raise finance and, by extension, lowers the cost of capital and boosts firm valuation.

A wide range of opportunities to create value

We have singled out three major contributions of currency management in terms of creating value for the business: (1) stimulating growth while protecting and enhancing profit margins; (2) lowering the variability of cash flows; (3) presenting more informative financial statements. We can mention even more benefits:

  • Taxation is optimised as smoother earnings reduce the tax burden when higher levels of profits are taxed at a higher rate.
  • Capital efficiency is raised when pricing with the FX rate improves the firm’s competitive position without hurting budgeted profit margins.

While most of these advantages have been known by CFOs for many years, there is a new factor to consider: they can be implemented with Currency Management Automation solutions that remove most of the resource-consuming, repetitive and low-value tasks performed by the finance team, eliminating unnecessary operational risks along the way.

With an added bonus: by leveraging currencies, CFOs have the opportunity to take decisive steps in terms of digitisation. According to a recent HSBC survey, digitisation is seen as the most positive factor by 84% of CFOs overall, as they expect investments in digital technology to have a “positive impact on their business”, with more than half of them expecting it to give the business model “a large boost”.

The time to act is … now!

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4 ways to optimise currency management in times of crisis

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14-06-2022 | treasuryXL | Kantox | LinkedIn |

Did you know that CurrencyCast season 2 of Kantox is now available? In the first episode of the season, we look at four must-have tools to help you optimise your currency management and protect your business from risk in times of crisis. To see all episodes of CurrencyCast, click this link.

Credits: Kantox
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This week’s CurrencyCast looked at the four Currency Management Automation tools you need to navigate 2022’s predictable unpredictability. Here are our key takeaways:

(1) Put cash and currency management on the same page

The tool? The first Currency Management Automation tool is automated swap execution.

Why? Because, in times of pandemic and war, “Cash is King “. A recent risk treasury survey by HSBC finds that as many as 82% of CFOs say that cash management has been the most crucial issue during the last three years—and that is unlikely to change any time soon. The point is that cash management and FX risk management need to go hand in hand, especially in the current context.

How? By automatically executing the swap transactions that are necessary to adjust hedging positions to the settlement of the underlying commercial transactions, as cash flow moments do not always coincide. Failing to automate these cash adjustments properly hinders the whole risk management process. Yet, in FX risk management, cash management related tasks need as much attention —and as much automation— as other tasks of the FX workflow, like pricing with an FX rate, collecting and processing exposure information, or executing hedges.

(2) Optimise the impact of shifting interest rates 

The tool? The second Currency Management Automation tool is a robust FX rate feeder that enables commercial teams to price with the appropriate exchange rate, whether it’s the spot or the six-month forward rate, with all the required pricing markups per client segment and currency pair.

Why? Because interest rates are shifting in many places as we speak. As interest rates change, so does the difference between exchange rates with different value dates, also known as forward points. On the one hand, if your company is based in a strong currency area like Europe or North America and you are selling into Emerging Markets, your commercial teams may need to price with the forward rate to avoid unnecessary losses on the carry. On the other hand, you can take advantage of ‘favourable’ forward points to price more competitively without hurting your budgeted profit margins.

How? Most Treasury Management Systems (TMS) are not equipped with what we call at Kantox a ‘strong FX rate feeder’ that would enable commercial teams to quote with the appropriate exchange rate, in this case, the forward rate. For that, you need a software solution that, working alongside your existing systems, provides your commercial teams with all the FX rates they need for pricing purposes.

(3) Prepare for disrupted supply chains 

The tool? The third Currency Management Automation tool is an FX hedging program that allows you to delay —as much as possible, and according to your own tolerance of risk— the execution of hedges.

Why? Right now, as we speak, global supply chains are in turmoil. Commodity prices are seeing wild swings, and the economic outlook remains uncertain. This may lead to lower visibility regarding your cash flow forecasts and your forecasted exposure to currency risk.

How? One of the most fascinating tools that we have developed at Kantox —about which we will devote a future episode of CurrencyCast— allows treasurers to create a buffer from a ‘worst-case scenario’ FX rate that you wish to protect, if your aim is to keep steady prices during an entire campaign/budget period, and you can reprice at the onset of a new period.

This buffer, created by means of conditional FX orders, provides the flexibility to leverage information from incoming firm sales/purchase orders that are hedged. Forecast accuracy is usually correlated with time. As the campaign progresses, that flexibility allows you to gain more visibility into what is typically considered the less visible part of your exposure.

Delaying hedge execution also will enable you to:

(1) Create savings on the carry if forward points are not in your favour

(2) Set aside less cash than would otherwise be the case in terms of margin and collateral requirements

(4) Protect your profit margins and cash flows

The tool? Last but not least, the fourth Currency Management Automation tool needed to tackle 2022’s predictable unpredictability is —quite obviously— a strong FX hedging program.

Why? Because you need to protect your budgeted operating profit margins and company cash flows from currency risk. You may also desire to reduce the variability of your performance as measured in your financial statements. By allowing your firm to confidently buy and sell in the currency of your suppliers and customers, you take advantage of the margin-enhancing benefits of ‘embracing currencies’.

There is an additional benefit that may prove particularly relevant these days. In the event of a sharp devaluation of your customer’s currency, if you only sell in a handful of currencies such as EUR or USD, your customer may be tempted to unilaterally wait for a better exchange rate to settle their bills. You don’t want to be in that position — and you do it by selling in local currencies in the first place.

How? With the help of a family of automated hedging programs and combinations of hedging programs designed to systematically protect your firm from currency risk. These can be personalised whatever the pricing patterns of your business — whether you face dynamic prices or you desire to keep steady prices during an entire campaign period, or you wish to keep prices as stable as possible during a set of campaign periods linked together.

The top challenges that will affect your FX risk strategy in 2022

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04-04-2022 | treasuryXL | Kantox | LinkedIn |

“The year of predictable unpredictability”, as The Economist calls it. But what challenges lay in store for risk managers in 2022 when it comes to their FX risk strategy?

Credits: Kantox
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1. Shifting interest rate differentials across currencies

Let’s start with the first of our challenges that will affect your FX risk strategy in 2022, namely shifting interest rate differentials across currencies. This is the result of central banks reacting to inflation and inflation expectations. This will, in all likelihood, lead to increasing differences between FX rates with different value dates—also known as forward points. Central banks from a wide range of countries have adjusted their short-term interest rates in 2021, and more are set to act in 2022: Chile, Brazil, Czech Republic, UK, Hungary, Poland, NZ, South Africa, and South Korea among others.

Is your company well-prepared to manage those shifts? Is it well-prepared to take advantage of favourable forward points? In the event of ‘favourable’ forward points, for example, when a company sells and hedges in a currency that trades at a forward premium, pricing with the forward rate would allow that company to price more competitively—without endangering its profit margins.

As Toni Rami, Kantox’s Co-founder and Chief Growth Officer says, “most companies fail to take advantage of this opportunity, either because they lack the technology to do it, or because they are not aware of it, or because of both”.

Is it well prepared to protect itself from unfavourable forward points? This is shaping up to be a key concern in 2022. It would be the case, for example, of a company that sells (and hedges) in a currency or in currencies that trade at a forward discount, like a Europe- or a US-based firm that sells, for example, in Brazil.

This company could protect itself by setting boundaries around its FX pricing rate by means of automated and dynamically updated profit-taking and stop-loss orders in order to delay as much as possible the execution of the hedges. Failure to have this mechanism in place will mean:

(a) unnecessary financial losses due to the cost of carry (a key point in 2022 given recent developments in central bank policies)

(b) too much capital tied up in terms of collateral/margin requirements

(c) not enough time at your disposal in order to fine-tune and improve your forecasts (FX surveys consistently show that CFOs and treasurers would like to have more time at their disposal to fine-tune and improve their forecasts)

2. Ongoing pressure on profit margins

Turning to the second challenge, is the ongoing pressure on profit margins. There is a clear need for better, more dynamic pricing systems, as McKinsey surveys consistently show. Does your company have a proper system to price with FX rates? On the face of it, this looks like a simple proposition. It’s not. It requires a system to fetch the appropriate FX rate with criteria in terms of:

(a) sourcing the FX rate;

(b) communicating that FX rate to commercial teams

(c) updating that rate according to time-based or data-driven criteria.

And it also requires a system to create the FX-pricing rules that your business needs. Failure to have these systems in place will likely result in not being able to properly set the pricing markups —per client segment and per currency pair— that your commercial strategy requires and not being able to adequately use the forward rate for pricing purposes.

Take, again, the case of unfavourable forward points, namely a firm that sells and hedges in a currency that trades at a forward discount, or that buys and hedges in a currency that trades at a forward premium. With the proper pricing rules in place, the firm needs to price with the forward rate. That would allow it to avoid unnecessary financial losses on the carry. In 2022, with several EM central banks preparing to further raise short-term interest rates, this is likely to be a critically important element in any FXRM strategy.

3. The uncertain FX markets outlook

Finally, the uncertain FX markets outlook is a reminder of the importance of having a solid FX risk management strategy in place in 2022. According to Citi’s latest Treasury Diagnostics survey, 79% of risk managers have exposure to non-G10 currencies, in many cases unhedged because of costs, liquidity and regulations; 60% of treasurers expect a new client base in emerging markets to be the largest driver of FX-denominated sales growth. Yet 57% of CFOs say they suffered lower earnings in the past two years due to significant unhedged FX risk (worldwide), rising to 77% in EMEA. America: 61%, Asia: 43% (HSBC survey).

This requires automated hedging programs and/or combinations of automated hedging programs. Failure to have these programs in place in 2022 is likely to mean: (a) a high variability in performance, whether it is measured in cash-flow terms or in terms of accounting results; (b) failure to adequately protect and enhance operating profit margins; (c) the possibility that your customer’s FX could turn into your own credit risk if excessive currency volatility forces them to wait for a better exchange rate to settle their bills.

Worried about your FX risk health? Take our free assessment and get a personalised insights report in minutes. 

The Do’s and Dont’s of Pricing with an FX Rate

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09-03-2022 | treasuryXL | Kantox | LinkedIn |

Give up your time-driven rules for pricing with an FX rate and go for a data-driven approach instead!

In this article, we are going to highlight the challenges faced by treasurers as they seek to manage pricing risk. According to Toni Rami, Kantox’s co-founder and Chief Growth Officer: “Understanding pricing is perhaps the most crucial element in order to design a great FXRM program

Credits: Kantox
Source

Click on the image above for the corresponding episode of CurrencyCast

Pricing risk

Pricing risk is the risk that —between the moment an FX-driven price is set and the moment it is updated— shifts in FX markets can impact either a firm’s competitive position or its profit margins.

 

The natural way to reduce it is to increase the frequency of price updates. After all, the price itself is a potent hedging mechanism. But that is not an option for companies that wish to keep steady prices during a campaign/budget period or during a set of campaigns/budget periods linked together.

We will discuss this situation in further articles. Today we want to highlight the shortcomings of the most widely used criteria for pricing updates: time-driven criteria.

Shortcomings of time-driven criteria

A time-driven rule to manage pricing risk consists in setting a time frame between the moment an FX-driven price is set and the moment it is updated. It can be every 24 hours, every week, every month. Quite obviously, the longer the time to the update, the higher the risk.

At Kantox, we are convinced that this approach is arbitrary, that it doesn’t protect you against FX risk, and that it does not reflect the business or financial needs of the firm. Take the 24-hour rule. Why not 23 hours or 25 hours instead? A time-based approach does not eliminate risk: a  sharp move in markets can well take place inside a very short time span before prices are updated.

Another way to see this is that it makes it more difficult for the firm to react to favourable moves in FX markets. Take the case of a firm that prices and sells in EUR and buys in USD, using the EUR-USD currency rate as a key pricing parameter. A rise in the EUR could allow it to outsmart the competition by pricing more competitively without hurting its budgeted profit margins.

Failure to take advantage of this type of opportunity is a serious shortcoming in terms of pricing strategies, at a time when —according to consultants McKinsey— pricing is becoming a key strategic element in today’s competitive landscape.  

The alternative: data-driven criteria

At Kantox, we believe that such arbitrary time-driven rules should give way to a data-driven approach that consists of setting boundaries around an FX reference rate, such that prices are updated only if the market moves beyond the upper and lower bounds of those boundaries. The system then serves a new reference rate and dynamically adjusts the upper and lower bands around it.

If FX markets remain relatively stable, then the firm can keep steady prices, something that is attractive in many B2C setups. This approach also allows treasurers to take advantage of favourable moves in currency markets while protecting budgeted profit margins, independent of when these movements occur.

How far or close to the reference rate these boundaries are set reflects risk managers’ tolerance to FX risk. In addition, the pricing configuration can be adjusted according to the goals of management in terms of:

  • Setting the pricing markups per client segment and per currency pair that the business strategy requires.
  • Selecting the tenor of the FX rate used in pricing. Do you wish to price with the spot rate? Or with the three-month or six-month forward rate instead? If your company is based in a strong currency area such as North America or Europe, and it sells into Emerging Markets, pricing with the forward rate will protect it from adverse interest rate differentials. Firms that lack this possibility may be tempted to apply too drastic markups, thereby unnecessarily damaging their competitive position.

While most Treasury Management Systems lack what we call a ‘strong FX rate feeder’, Currency Management Automation solutions —working alongside your existing systems— allow finance teams, among many other things, to set up an efficient data-driven solution to manage all the aspects of pricing with FX rates, including pricing risk.

Worried about your FX risk health? Take our free assessment and get a personalised insights report in minutes. 

The four expectations of Currency Management Automation

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14-02-2022 | treasuryXL | Kantox | LinkedIn |

With FX volatility intensifying and exposing companies to even greater currency risk, treasurers & CFOs are faced with many challenges as they look to step up their FX risk management strategy. The key to this is currency management automation, but what are the critical problems an automated solution needs to solve to become a worthwhile tool in your treasury kit?

Click on the image above for the corresponding episode of CurrencyCast

The four main expectations of currency management automation for CFOs and treasurers are:

  1. The need to improve time management
  2. To remove operational risks
  3. To improve the efficiency of treasury operation
  4. To place themselves in a position to make a strategic contribution in terms of enhancing the value of the firm

Challenge 1: Improving time management

According to the 2021 HSBC Corporate Risk Management survey, 55% of treasurers say FX risk management takes up most of their time; and 44% find that automation frees up time. Throughout the FX workflow, members of the finance team manually execute many tasks. These are repetitive, time-consuming and add little value. The French have a wonderful expression to define those tasks: they call them chronophage — literally, they eat away your time. With more time at their disposal, treasurers could focus on more value-adding activities, such as improving and fine-tuning their forecasts.

Challenge 2: Removing operational risks

Throughout the FX workflow, operational risk is omnipresent. Operational risk is the risk that inadequate or failed internal processes can pose to your business. Take spreadsheet risk. From the moment an FX rate is sourced for pricing purposes to the budgeting process, and all the way to the cash flow moment of the post-trade phase, dozens, hundreds, perhaps thousands of spreadsheets circulate across the enterprise, magnifying the risk of manual data input error.

A recent Citi Corporate Treasury survey showed that 80% of FX risk managers remain reliant on Microsoft Excel. In our conversations with CFOs and treasurers, we noted that often, a handful of people or even sometimes a single individual is in charge of executing most –if not all– the tasks of FX risk management across the entire enterprise. These enterprises can often comprise of subsidiaries, each with its own set of currency pairs. This is the very definition of key person risk.

Taken together, spreadsheet risk and key-person risk are part of operational risks that can cause serious damage to your FX risk management strategy.

Challenge 3: Improving the efficiency of treasury operations

According to this same Citi Corporate Treasury survey, efficiency gains in treasury is the number one expectation of technology. There is a myriad of ways in which the efficiency of treasury operations can be improved in FX risk management.

Consider most Treasury Management Systems (TMS) shortcomings, even those with FX capabilities. Looking at the FX workflow, most TMS are incapable of proactively helping risk managers execute their tasks. Why though?

(a) They lack a robust rate feeder that allows the business to price with the forward rate when forward points are in favour or ‘against’.

(b) They are adequate for balance sheet hedging, but they fail to capture the type of exposure needed in cash flow hedging (e.g. forecasted exposure for individual campaigns/budget periods in static hedging; forecasted exposures for sets of campaigns/budget periods linked together for layered hedging etc. ),

(c) They lack the level of automation –during the cash flow moment of the post-trade phase of a hedging program– needed to efficiently handle the adjustment of hedges to the underlying cash flows.

Challenge 4: The need to make a strategic contribution in terms of enhancing value

HSBC’s survey showed that only 23% of treasurers see themselves as ‘best-in-class’ when it comes to FX hedging. With FX risk firmly under control thanks to a family of automated hedging programs and combinations of hedging programs, CFOs and treasurers would be in a position to:

(a) Diminish the variability of corporate performance
(b) Secure and enhance operating profit margins
(c) Improve the competitive position of the firm
(d) Make more efficient use of invested capital by boosting the sales/capital ratio and by minimising the amount of capital that needs to be set aside for collateral and margin requirements

Improving time management and removing operational risks are the most visible, the most tangible expectations of currency management automation, but they might not be the most important ones. Much more important for your company is to be in a position to improve the efficiency of Treasury operations and to make a strategic contribution towards enhancing the value of the firm.

CurrencyCast | Episode 1 – The 4 Expectations of FX Automation

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26-01-2022 | treasuryXL | Kantox | LinkedIn |

It’s finally here! CurrencyCast, our new podcast, is live.  Every week, we’ll provide bite-sized tips and expert insights to help you better manage foreign currencies and optimize your P&L results.

Click on the image above to watch the first episode: The 4 expectations of FX automation

This week, we offer our view on the make-or-break FX challenges treasurers and CFOs will face in 2022. Last year was a highly unpredictable year in terms of currency volatility and this year looks to follow a similar pattern, especially with a sharp shift in interest rates.

But how can you protect your business and profit margins from such instability and uncertainty? Our FX expert and writer, Agustin Mackinlay, outlines his expectations for shifting interest rate differentials across currencies, ongoing profit margin pressure due to rising costs and more during this episode.

He’ll provide insights on how to handle each issue so you can make more informed decisions for your FX risk strategy in 2022.

Head to your preferred channel and catch episode two, where we look at the: 𝐓𝐨𝐩 𝐜𝐡𝐚𝐥𝐥𝐞𝐧𝐠𝐞𝐬 𝐭𝐡𝐚𝐭 𝐰𝐢𝐥𝐥 𝐚𝐟𝐟𝐞𝐜𝐭 𝐲𝐨𝐮𝐫 𝐅𝐗 𝐬𝐭𝐫𝐚𝐭𝐞𝐠𝐲 𝐢𝐧 2022. 

CurrencyCast | A podcast by Kantox

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20-01-2022 | treasuryXL | Kantox | LinkedIn |

Introducing our new weekly FX podcast, CurrencyCast! A no-holds-barred series on the urgent foreign exchange challenges facing treasurers and CFOs today.

Introducing our new weekly FX podcast, CurrencyCast! A no-holds-barred series on the urgent foreign exchange challenges facing treasurers and CFOs today.

Every week, FX writer Agustin Mackinlay gets candid about what finance departments are doing wrong when managing their currencies and risk. He’ll provide bite-sized insights to help you better understand your FXrisk and push your treasury to the next level.

It’s an FX masterclass, all in under 10 minutes!

Mark your calendar for January 26th at 10am (CET) and subscribe to our YouTube channel to be one of the first to access our new series.

Subscribe now for the CurrencyCast!

Tame the ghost! Cancellations & currency management in Travel

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20-12-2021 | treasuryXL | Kantox | LinkedIn |

How to automate the FX treatment of cancellations

It is no secret that the wave of cancellations following Covid-imposed travel restrictions has been a nightmare for travellers, airlines, hotel chains and tour operators alike. In the United States alone, cancelled domestic flights peaked at 137 thousand in April 2021. Largely due to cancellations, air traffic in Europe in 2021 was barely equivalent to 43% of the level seen before the pandemic.

Given the amount of time and resources devoted to adjusting their refunding policies, many players in the industry are still scared by the ghost of cancellations. But is that fear warranted? Not when it comes to FX management. This is because Currency Management Automation gives travel companies the tools to minimise the P&L impact of cancellations.

When it comes to FX management, the message is crystal clear: the ghost can be tamed.

Cancellations and FX exposure

FX risk management is a process in three phases: the pre-trade, the trade and the post-trade phase. Cancellations are an important element of the pre-trade phase, when the exposure to currency risk is collected and processed. Now, the type of exposure and the way it is managed depends, crucially, on each business’ pricing dynamics (see: “The hidden secret behind the different types of FX exposure”).

In the Travel world, dynamic prices are the norm (see: Currency Management Automation in Travel Distribution). OTAs, Bed banks, Hotel chains, DMCs and others frequently update their FX-denominated prices, and their cash flows are at risk from the moment of the bookings till settlement. For this reason, most Travel distribution firms apply micro-hedging programs that take those ‘firm commitments’ as the key FX exposure item.

This is where cancellations kick in. A cancelled FX-denominated booking diminishes the exposure to currency risk if the corresponding hedge has not been executed, or if an already executed trade is closed out at the same FX rate. Otherwise, there would be a situation of over-hedging. Manually adjusting hundreds or thousands of individual pieces of exposure to their corresponding hedges can quickly become an impossibly complicated task.

Taming the ghost in FX-related cancellations

Currency Management Automation provides treasurers with a number of tools to tame the ghost of cancellations. The first line of defence is to include —as part of business rules defined in the process of FX automation— an automatic cancellation rate. For example, if managers set an average cancellation rate of 10%, Kantox Dynamic Hedging® will hedge the remaining 90% hedge of the bookings.

As more information becomes available, this cancellation rate can be refined and adjusted by management when it so desires. While it is good practice to try and anticipate events, perfect accuracy cannot be expected in matters related to travel cancellations, especially in the current situation. This is why a second line of defence is provided by what our FX automation software takes as ‘negative entries’, a more efficient way to deal with cancellations. Let us briefly see how that works.

An entry is an individual piece of exposure. As part of the implementation phase of the software, risk managers establish a set of business rules that include —for each currency pair— the accumulated value of the entries they wish to hedge. These instructions also include a rule for setting negative entries from their own ERP, Booking Engine or Data Lake in the event of cancellations. API-transmitted negative entries automatically cancel the corresponding FX exposure.

But what happens when a negative entry is pushed after the corresponding hedge has been executed? Not much. Because travel-related FX exposure typically includes hundreds/thousands of individual transactions, new positions are constantly entered for the same currency pair and value date. The more granular the information included in these entries, the more accurate the FX hedging process, and the better the traceability of each piece of exposure.

Conclusion: speed is the name of the game

As the effects of the global pandemic still loom large, the ability to quickly process cancellations is a must for airlines, hotel chains and wholesalers in general. FX management is an integral part of this process — and it relies mostly on automated micro-hedging programs for bookings or ‘firm commitments”.

These micro-hedging programs, in turn, automatically treat cancellations as a key element of the ‘pre-trade’ phase of exposure management. If your aim is to tame the ghost of cancellations —while relieving the finance team from performing repetitive, resource-consuming and potentially risky manual tasks—, FX automation is the starting point.

The time to act is now!

The hidden secret behind the different types of foreign exchange exposure

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23-11-2021 | treasuryXL | Kantox | LinkedIn

Fresh from leaving the famous Genesis rock band that he helped found, songwriter and musician Peter Gabriel came out with an innovative album called Exposure, where his fascination with electronics and new recording techniques was openly on display. In the eponymous song, he kept on droning the E-word over and over:

Exposure
Exposure
Exposure
Exposure
Exposure

 

At Kantox we share this almost obsessive-like concern. But we care about FX exposure, a very specific kind of exposure. And so do most corporate treasurers: according to the last Kantox & TMI FX Survey, exposure-related concerns are seen by as many as 66% of participants as the most important FX challenge faced by companies.

In this blog we seek to determine the three types of foreign exchange exposure:

  1. Forecasts of revenues and expenditures
  2. Firm commitments for sales/purchase orders
  3. Accounts receivable/payable

 

Understanding the different types of foreign exchange exposure

FX exposure, in a nutshell, is the degree to which a company is affected by changes in exchange rates. To arrive at a precise definition of the three types of foreign exchange exposure, we need to understand the goals set by management in terms of its FX risk management policy.

If the goal is to remove accounting FX gains and losses, then accounts receivable and payable are the key pieces of exposure. If, however, management seeks to protect company cash flows from currency fluctuations, then the relevant type of exposure results from a set of company-specific business parameters.

These parameters include the firm’s sensitivity to FX (as measured by its profit margins and the weight of foreign currencies in the business), its degree of forecasting accuracy, the forward premium/discount of the currencies in which it operates, and several others. But the decisive element to consider is the firm’s pricing parameters.

Steady or dynamic prices? Forecasts and firm commitments

When determining the types of FX exposure, pricing dynamics play a key role. Does the company adjust selling prices after a campaign or budget period is over? Does it attempt to keep prices steady for a set of periods ahead? Or does it price dynamically with an FX rate? (*). Most firms implement one, or a combination, of the following pricing strategies:

Steady prices for individual campaigns/budgets. Some businesses keep steady prices for an entire campaign or budget and adjust them as the following campaign or budget period unfolds, thus incorporating FX fluctuations into the new prices.

⇒ TYPE OF FX EXPOSURE: forecasted sales and expenditures for each individual campaign or budget.

Steady prices for a set of campaigns/budgets. Competitive pressures may lead firms to keep steady prices across a set of campaigns or budgets without adjusting them, even in the face of sharp adverse currency fluctuations.

⇒TYPE OF FX EXPOSURE: rolling forecasts for sales and expenditures across a set of campaigns or budgets.

Dynamic prices. For firms that operate in a dynamic pricing environment, pricing is itself a natural hedging mechanism. FX risk arises from the time lapse between the moment a transaction is contracted and the moment it is finally settled in cash.

⇒TYPE OF FX EXPOSURE: firm commitments for sale and purchase orders

FX management and the types of foreign exchange exposure

This brief overview of the three types of foreign exchange exposure provides the starting point for a well-structured FX management process. Exposure items must be properly collected and processed before hedging programs can be implemented. Risk managers must know with precision how to retrieve, from disparate company systems, the information relating to each type of exposure.

 

Whereas most Treasury Management Systems provide the necessary information in terms of accounts payable/receivable, data about the two other forms of FX exposure —forecasts and firm commitments— are usually scattered between a host of company systems (ERP, CRM, specific software tools) and spreadsheets. This leads to a number of practical problems whose importance is usually underestimated:

  • Can the relevant pieces of exposure be retrieved in a timely manner?
  • Is the information complete and granular enough?
  • Who validates it, and through which processes?

Quite logically, the level of complexity increases in situations where different pricing parameters coexist within the enterprise, many currency pairs are in use, and both accounting and cash-flow related exposures are treated.

Technology to the rescue

The good news for treasurers is that Currency Management Automation allows them to efficiently collect and process the firm’s FX exposure with procedures that eliminate human error and other operational risks. The solution uses APIs to run the end-to-end FX workflow, allowing exposure data to seamlessly flow between different systems —ERP, TMS and others— without any need for spreadsheets.

Treasurers set up their own business rules according to the different types of foreign exchange exposure they need to collect and process, and let technology remove the risks and costs associated with manually executed tasks. With an added bonus: they can remove concerns about the accuracy of their budgeted FX exposure, giving them more time to improve forecasts.

(*) Note that more than one type of price dynamics can exist within the same company — think of heavy machines, spare parts, and services in the industrial engineering space, each with its different pricing criteria. In this case, the type of FX exposure will be different for each business line.

Expert-led Conversation | The Digitalisation of Treasury: Your FX Risk Management toolbox for 2022 | 30 November 2021

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treasuryXL | Kantox

 

Date & time: November 30, 2021 at 9.30 am CET | Duration 45 minutes

2022 is just around the corner, and we want to make sure you’re armed with the best technology tools to help push your treasury department to the next level. 

Join Kantox and TreasuryXL in this expert-led conversation on the future of FX risk management and the treasury trends to tap into in 2022.

 

Moderated by Pieter de Kiewit, owner of Treasurer Search, this deep-dive into the evolution of technology in treasury departments and the increasingly strategic role of the treasurer, will bring together insights from industry leaders, including Florin Hica, Head of Global Middle Office and Risk Strategies at ZF Group, Antonio Rami, Chief Growth Officer and co-founder at Kantox and François Masquelier, incoming President of the EACT.

 

The panel will be covering the following topics:

  • Treasury trends towards digitalisation
  • Why your Excel spreadsheet is not enough to manage currencies
  • The changing role of the treasurerThe session will close with a Q&A session.