Join senior treasury peers on March 7th in London at EuroFinance’s 10th annual Effective Finance & Treasury in Africa. Understand changing developments and the unique opportunities and challenges of doing business in this dynamic region.
This year’s speaker line-up includes experienced treasurers – all active in African markets – including:
● Edward Collis, Treasurer, Save the Children
● Neiciriany Mata, Head of finance, Angola Cables
● Marta de Teresa, Group treasurer, Maxamcorp
● Chigbo Enenmo, Finance and treasury manager, Nigeria LNG
● Folake Fawibe, Integrated business service lead, Danone, Southern Africa
● Jan Beukes, Group treasurer, MultiChoice Group
They will discuss important topics including cash and FX, payments, liquidity and financing, digital transformation, share success stories and provide practical guidance on how to optimise your treasury operation for growth.
For the full agenda and to register, please visitt this link.
Quote discount code MKTG/TXL10 for an exclusive 10% discount for TreasuryXL readers.
If you have any questions, you can contact the EuroFinance team directly at [email protected].
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We’re living in a multicurrency world and we’re multicurrency treasurers. You can get a head start on your competitors by simply understanding the benefits of operating with multiple currencies. Start leveraging the multicurrency world we’re in.
Disclaimer: This information is being shared for informational purposes only and was originally published by Kantox (Source)
With so many benefits to operating with the different foreign currencies out there, it is crazy to think that some companies are not taking advantage of this.
In this week’s episode of CurrencyCast we discussed why businesses should consider implementing a multicurrency approach to their FX risk strategy. This article will take a deeper dive into the benefits and give you some insight into how to be a more strategic treasurer.
Why we are in a multi-currency world
In this episode, we analyse a development that many find surprising, but that stands at the core of our thinking at Kantox: the multi-currency world. The prevailing view of a world dominated by a handful of currencies like the dollar and the euro is being challenged as we speak.
We’ll reveal how you can take advantage of the benefits that lie ahead in this multi-currency world and contribute to enhancing your profit margins.
How is technology pushing forward a multi-currency world
The currencies of a number of small, but well-managed economies (together with the natural rise of CNY) are gaining in importance: SEK, NOK, CAD, AUD, NZD, SGD and KRW among others.
The change is not driven in a top-down manner by macroeconomic forces. Instead, it reflects a bottom-up and microeconomic phenomenon, made possible by technology.
Today’s multi-currency world is mostly driven by corporate treasurers taking advantage of Multi Dealer Platforms such as 360T. These platforms have led to a dramatic compression of spreads, increasing liquidity beyond the major currency pairs and reducing the network effects of the USD.
For example, whereas a CAD-MXN transaction used to require two trades involving USD and CAD on the one hand, and USD and MXN on the other, now CAD-MXN can be directly and competitively traded on Multi-Dealer Platforms.
Advantages of the multi-currency world
Back to the issue of the multi-currency world. Let me mention some of the benefits of selling in more currencies (we discussed the advantages on the contracting side earlier on):
FX markups. With multi-currency pricing, businesses can monetise existing FX markups.
High-margin sales. Companies can drive direct, high-margin sales on company websites with many different payment methods.
Reduced cart abandonment. Online businesses can deploy multi-currency pricing as their secret weapon to reduce cart abandonment.
Let’s take this example if you are a company operating with imports from a foreign country there could be some hesitation regarding whether to work with the local currency or not. In certain cases, using the local currency translates into better deals from a commercial perspective, as FX markups from suppliers are avoided. Also, firms get access to a wider range of suppliers.
From a liquidity management perspective, you may benefit from extended paying terms as well giving you more runway to finalise your sales. Finally, from a strictly financial perspective, there could be a wider forward discount of currency pairs which is a way to generate more positive forward points when hedging.
A strategic issue in the age of innovation
By taking FX risk out of the picture, you put your business in a position to confidently use more currencies in day-to-day operations. Additionally, if you then implement the best automation solution that will help you remove time-consuming and error-prone tasks, you could have a strong currency management strategy that becomes a great strategic asset.
On top of that, there are other bonuses to implementing technology:
Optimisation of interest rate differentials between currencies
More time to devote to value-adding tasks
Openness to further automation
Wrap up
Now you know all the benefits of a multicurrency world for currency managers. By empowering commercial teams to always buy and sell in the most profitable currency, the finance team acts as a strategic business enabler within the enterprise. That is the promise of the multi-currency world that is taking shape as we speak.
You are now prepared to face the future of currency management and reap all the benefits of the multiple currencies available. But to keep the ball rolling and make the most of foreign currencies, you need a tool that allows you to have full control of your FX exposure.
https://treasuryxl.com/wp-content/uploads/2023/02/ep-2-200.png200200treasuryXLhttps://treasuryxl.com/wp-content/uploads/2018/07/treasuryXL-logo-300x56.pngtreasuryXL2023-02-03 10:19:162023-03-03 12:06:39Uncovering the benefits of a multicurrency world
This call took place five days after FTX filed for bankruptcy. However our discussion did not dwell on crypto as an investment (We haven’t found a treasurer who would). The interest for treasurers is to help their companies understand the business opportunities of the metaverse, and that isn’t going away.
According to Gartner,’ [https://www.gartner.com/en/articles/what-is-a-metaverse] by 2026, 25% of people will spend at least one hour per day in a metaverse for work, shopping, education, social media and/or entertainment’, and…’A metaverse is not device-independent, nor owned by a single vendor. It is an independent virtual economy, enabled by digital currencies and non-fungible tokens (NFTs).’
So it’s no surprise that many companies are developing strategies to capitalise on what could be a massive business opportunity. Participants in this call comprised treasurers representing companies at different stages of this journey, all facing the challenge that the regulatory and financial infrastructure available is at an early stage of evolution.
About half of the participants are still investigating the use of crypto and exploring how it works in case it does evolve within their businesses, but still not necessarily wanting to accept crypto or handle crypto within treasury operations.
Risk management to enable safe use in Corporate Treasury remains paramount and it isn’t easy.
We are seeing continued evolution around the NFT space and using crypto for settlement. But it continues to be quite limited.
Accounting requirements for how crypto currencies are handled are still not clear and not necessarily sustainable for the future. Regulations are going to evolve.
It is fascinating to hear, for the first time, crypto working capital is being used to match crypto receivables to payables in certain types of crypto currencies, e.g. Ether.
In the last 12 months companies have started to buy land in the metaverse in order to understand how it works as a marketing tool.
Selecting crypto currency platforms is challenging and KYC with some is a (reassuringly) painful experience. The providers discussed in this report include: Etherium, Coinbase, Mt Pelerin, Bit Panda and Anchorage.
For the most part, banks are watching the space and have yet to come up with solutions for corporates and CBDCs are at an early stage, but one thing we can be sure of is that there is a lot more to come on this topic.
Crypto has clearly not gone away for corporate treasurers and I’m certain we’ll see further uses going forward. There is a huge amount of detail in this report, which is essential reading for any treasurer wishing to understand the challenges or benchmark their processes.
Acces to the full report is only available to subscribers to “Treasury Practice”. If you would like to request a subscription to this topic, please message [email protected].
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If we look back at the economic landscape of last year, treasurers and CFOs have been dealing with risky scenarios for a while. But is the future as dark as some say? Our latest episode of CurrencyCast featured the treasury trends for 2023. In this article, we will take a deep dive into those trends and give you some tips on how to tackle the challenges in this volatile landscape.
Treasury trends for 2023
Consultants and pundits are busy laying out scary scenarios for 2023. However, the future is uncertain so let’s not waste time in futurology trying to predict what’s coming.
Instead, we can focus on understanding the treasury trends of 2023. In this article, we’ll analyse those trends with a focus on currency management and give you actionable tips on how to handle any hurdles ahead.
CFOs and corporate treasurers need to be well prepared for the upcoming challenges and opportunities as they manage currencies. The top five priorities in the corporate treasury space for 2023 are:
In the past year, the financial markets have seen high levels of FX volatility and an unstable economy that seems to point towards a recession. Trends of high inflation, banks’ rising interest rates, political instability, and more will remain in the new year.
Hence why, it is fair to say that currency managers need to be well-prepared to face interrelated risks affecting FX rates. Companies dealing with foreign currencies will have difficulties accurately forecasting cash flows.
However, there is no reason to panic yet. There are a few strategies that corporate finance professionals can implement to tackle FX volatility; we will explain them later.
Shifting interest rate differentials
Shifting interest rate differentials are a likely scenario in 2023 as central banks act to tame inflation, each at its own pace. The good news is that companies can optimise such interest rate differentials across the entire FX workflow. Here are a couple of examples:
– With favourable forward points, pricing with the forward rate improves the firm’s competitive position without hurting budgeted profit margins.
– With unfavourable forward points, pricing with the forward rate helps managers avoid losses on carry and the temptation of excessive pricing markups.
– Finally, the cost of hedging can be lowered by delaying hedging execution with the help of automated conditional FX orders.
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Liquidity management
In addition, the current emphasis on strong liquidity management will persist well into 2023. Liquidity management allows the treasury team to have a wider view of the company’s resources and be financially agile.
This will give any treasury professional the required accurate insights on the cash projections. And ultimately, help the business be prepared for potential liquidity risks that may arise.
Cash flow visibility
Avoiding less-than-stellar cash flow visibility will be top of mind for treasurers in 2023. As economic cycles could be disrupted again, companies need to be able to get ahead of the curve and reduce deviations in their cash flow projections.
However, we believe that the importance of having accurate cash flow forecasts is somewhat overstated, at least when it comes to currency risk management.
To understand why this is so, the treasury team should consider how the different cash flow hedging programs deal with this concern:
– In firms with dynamic prices, forecasting accuracy is not much of a concern because firm sales/purchase orders have a very high occurrence probability.
– In firms with steady prices across several campaign/budget periods, layered hedging programs build the hedge rate in advance instead of protecting an FX rate.
– In firms with steady prices for a single campaign/budget period, conditional orders to protect the budget rate provide managers with time to update their forecasts.
For better cash flow visibility in the new year, companies will need to consider their ability to implement hedging programs that best suit their needs.
Automation
In 2023, the role of the corporate treasurer will require professionals to improve their technological skills. The traditional treasury function is shifting towards an automated digital infrastructure that enables increased efficiency and faster processes.
To manage currency risk in the new year, treasurers will need to move away from siloed systems and wasting time on manual tasks. Instead, they need to look for a solution that is able to automate the entire FX workflow.
Tools that are able to connect, via APIs, to their treasury management system and other data sources, for updated reports that give accurate insights into their FX exposure.
Facing the challenges
Now you know the treasury trends that will be dominating 2023 for corporate treasurers. But we also want to give you some tips on how currency managers should act in the face of such challenges.
As we like to emphasise at Kantox, currency management is much more than currency risk management. And currency risk management, in turn, is more than just the act of executing a hedge. Let us see this in more detail.
Consider the case of automated conditional orders to protect a budget rate. To the extent that the underlying levels are not hit, no trades are executed. Yet, you are stillactively managing your firm’s exposure to currency risk.
Delaying hedges may lead to netting opportunities thatultimately result inless, not more, hedging transactions. The results are:
Less trading costs
Savings on the carry in the event of unfavourable forward points
Less cash immediately set aside for collateral requirements
The right approach for 2023
Pundits predicting a catastrophic 2023 may turn out to be right. Then again, they might not. In any case, the priority for currency managers is to take a holistic view of currency management that allows them to:
Embrace the entire FX workflow
Avoid silos and have commercial and finance teams work hand in hand
Take advantage of the profit margin-enhancing opportunities offered by currencies
As you have seen, corporate treasurers will need to be well-prepared for all the interrelated risks of the turbulent economic landscape. With the help of the right automation tools, the treasury function can have a strong currency management strategy that helps them storm the weather outside.
Kantox is the currency management automation solution that covers the entire FX workflow so you can improve your profit margins and leverage foreign currencies.
Book a free strategy session with our currency management specialists to learn more.
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ComplexCountries reports detail how corporate treasurers approach challenges in complex countries, across associated treasury processes and how they adapt to economic and regulatory changes.
Their reports cover a wide range of topics associated with treasury processes in these countries, and how they are impacted by economic and regulatory changes. This includes how corporate treasurers approach currency risk management, compliance with local regulations, and maintaining cash and liquidity in the face of political and economic instability. The goal is to help treasurers navigate these challenges and protect their company’s financial position.
Find below some of the free reports detailing complex country challenges for treasurers
Please log in on the website of ComplexCountries. Or contact ComplexCountries to find out about their subscription packages.
https://treasuryxl.com/wp-content/uploads/2023/01/cxc-200.png200200treasuryXLhttps://treasuryxl.com/wp-content/uploads/2018/07/treasuryXL-logo-300x56.pngtreasuryXL2023-01-26 07:00:472023-01-26 09:31:38What is possible in Complex Countries for Treasury?
Payments fraud in 2021 was as bad, if not worse, than the year before, according to the 2022 AFP Payments Fraud and Control Survey. But even though business email compromise (BEC) scams dropped substantially last year, many organizations are still falling prey to them and incurring significant losses.
At the heart of BEC scams and more recent developments like deepfake fraud is impersonation. Cybercriminals use social engineering tactics to develop profiles on company employees or routine vendors, which they then impersonate to dupe unsuspecting people into making critical mistakes.
To identify an impersonator, it’s helpful to know the telltale signs. More than likely, the payment request will be urgent and will attempt to exploit unique circumstances, such as a specific time when employees are out of the office. Additionally, if your organization is making a lot of payments to contractors for a project, fraudsters might attempt to exploit that.
For example, Philabundance, a Philadelphia food bank lost about $1 million due to a successful BEC scam. The food bank was in the process of building a $12 million community kitchen. The accounts payment (AP) team received an invoice from what they thought was a construction company supplier and made a payment.
The Government of Carrabus County, N.C., also found itself victimized by a vendor BEC scam. The county intended to send money to a contractor it had been working with for the construction of a new high school. Through a series of emails that began in late 2018, the fraudsters made requests to update bank information. The county didn’t do its due diligence and ultimately sent more than $2.5 million to the fraudulent account. While over $776,000 was ultimately recovered, about $1.7 million remains unaccounted for.
Common Fraud Myths
When it comes to payments fraud, many treasury and finance departments still get lulled into thinking they are more protected than they are. Organizations may assume that their procedures are infallible or that any lost funds will be reimbursed, but they quickly get a wake-up call when a successful attack happens. The following myths are common.
“We have an approval process in place.” Even the companies with the strictest policies in place can still have a breakdown in processes. Employee ID/password combinations can be stolen. Regional treasury/shared service centers may require fewer numbers of approvals due to limited in-country staff. And companies with multiple ERP systems might have different approval processes—a scenario that is ripe for fraud.
“My bank will cover me.” There is no obligation for a bank to cover any client for payments fraud, unless the bank itself has been breached, like in a bank employee scheme. The bank may still reimburse corporate clients on a case-by-case basis, but don’t bet on it.
“We have cyber insurance.” Many companies assume that if they purchase cyber insurance, that they are covered in the event of a loss. However, if an organization can’t prove that it took all the right steps to protect itself, it’s very likely that the insurance policy won’t cover the loss. Many plans don’t cover BEC scams, for example, because they involve an employee making an error. There have been several legal cases where insurance firms have refused payment and the courts sided with the insurers. Furthermore, even if cyber insurance does agree to pay out, you might still have to pay a high deductible. For some plans, that cost can be tens of thousands of dollars.
What Can You Do?
Fortunately, there are many ways to protect your payments and your data. The following tips can help.
Embrace the cloud. Organizations should embrace cloud technology to secure payments and systems. IT teams know that payments data and connectivity are more secure when hosted externally. However, not all cloud solutions are alike. Solutions like Kyriba Enterprise Security ensure that treasury, payments, and risk data meet internal security policies and international security requirements while providing 24/7, global support.
Align all departments. Your internal IT department, as well as any key areas that touch payment processing areas such as treasury, accounts payable, shared services, etc. all should be aligned with your security policies. With more and more companies allowing remote work, companies must ensure that all employees are using effective protections such as strong passwords, policy controls, multifactor authentication, IP filtering, single sign-on and data encryption.
Automate payment processes and standardize controls. Automation allows organizations to standardize the payment journey from the initial request to the receipt of the payment. Risk lies in the exceptions to a standardized process, i.e., payments made outside of this typical format that provide fraudsters with opportunities. Again, these are usually one-time, urgent payment requests that can come in for things like mergers and acquisitions, legal settlements, emergency payroll, etc.
Enable real-time screening, alerts, and notifications. The rise of same-day and real-time payment systems has increased the need for real-time responses to fraud attempts. Modern fraud detection software uses artificial intelligence (AI) and machine learning to screen payments against historical payment data, pinpointing any anomalies.
Implement fraud prevention workflows. Modern payments fraud modules support fully automated, end-to-end workflows for the resolution of outstanding suspicious payments. Users can determine how each detected payment should be managed, enforcing the separation of duties between the initiator, approver, and reviewer of a detected payment.
Know your vendors. Vendors can be a major liability for your company. In some cases, vendors are granted access to their customer’s network credentials. If that vendor’s security protocols are lacking, they can become an unknowing backdoor into that customer’s systems. This is what happened in the infamous Target breach in 2013. Therefore, it is imperative to have a detailed information security questionnaire that can provide confidence in the governance and risk programs that a vendor has in place. Additionally, with vendor BEC scams proliferating, organizations need to make sure that requests for payment instruction changes are verified directly with the vendor before any transactions are completed.
Safeguarding Your Payments
To mitigate the risk and safeguard your payments, organizations must have a unified solution that connects ERPs, internal and external systems that allows for a secure, end-to-end payment journey. Furthermore, when exceptions occur, protocols can’t be abandoned no matter how urgent the request. Any departments that touch payments need to understand that one slip up can be catastrophic, not only leading to loss of funds, loss of job and reputational risk for the whole organization.
Kyriba is here to help you protect your organization against payments fraud. Learn more here.
https://treasuryxl.com/wp-content/uploads/2023/01/kyriba-200-1.png200200treasuryXLhttps://treasuryxl.com/wp-content/uploads/2018/07/treasuryXL-logo-300x56.pngtreasuryXL2023-01-25 07:00:592023-01-24 13:05:44Six Tips to Protect Your Organization Against Payments Fraud
19-01-2023 | Pieter de Kiewit | treasuryXL | LinkedIn | If you are interested in learning about FinTech and how to get into the industry, there are a few things you may want to consider. With my focus on corporate treasury, we are in close contact with various Fintech companies who ask us on a regular basis to support them in their recruitment. We learned these companies have specific requirements.
https://treasuryxl.com/wp-content/uploads/2023/01/fintech-pieter-200.png200200treasuryXLhttps://treasuryxl.com/wp-content/uploads/2018/07/treasuryXL-logo-300x56.pngtreasuryXL2023-01-19 07:00:082024-08-29 17:02:00How to get into FinTech? A Career Guide for 2024
17-01-2023 | treasuryXL | LinkedIn | Join Kantox and treasuryXL in this expert-led conversation on the future of currency management as we uncover the key treasury priorities and opportunities for the new year.
Now in its 2nd consecutive year, TIS is excited to release the findings from our 2023 Treasury Priorities & Opportunities Survey. Having run throughout the course of Q3-Q4 2022, our research again captured responses from hundreds of U.S. finance and treasury practitioners operating at companies of all sizes and industries. The goal was to capture their perspectives on a range of items including the ongoing adoption and use of finance and treasury technology, as well as upcoming staffing plans, strategic and operational expectations, and overall trends occurring in the space.
This blog serves as a summary overview of the key results and findings from TIS’ 2023 Treasury Priorities & Opportunities Survey. To access the full results and analysis, you can download the extended whitepaper here.
Overall Composition of Treasury Operations
Treasury Staffing & Professional Development Plans
Treasury Technology Investment & Focus
Cash Forecasting Preferences & Workflows
In total, over 250 practitioners responded to this year’s survey, which consisted of roughly 30 questions. All respondents held roles in either treasury or finance. In addition, all respondents were operating at companies with headquarters in the U.S., but most maintained an active international presence.
In terms of company size, 34% of represented companies had annual revenues of $100M – $1B, and another 34% had $1B – $10B annual revenue. 14% had revenues of over $10 billion, while 18% were under $100mm.
Regarding industry representation, construction and manufacturing firms accounted for over 27% of all respondents. Companies from the software, education, insurance, retail, and automotive sectors collectively accounted for another 40%.
In aggregate, our 2023 research initiatives are representative of an appropriately diverse spread of treasury and finance practitioners from a variety of company sizes and industries.
Treasury Responsibilities Increase as Staffing & Technology Investments Remain High
The findings from our 2023 research highlighted that despite strong economic headwinds and market uncertainty, a significant number of treasury teams are still expecting to add more staff and adopt new technologies in the year ahead. In fact, while 48% of teams expected to add more staff, only 3% planned to reduce their headcount. Similarly, over 50% of respondents plan to invest in new cash management and payments-related technologies.
This should be taken as generally reassuring news for practitioners, especially given the wide-ranging budget and staffing cuts that have occurred within many U.S. companies and institutions in the past few months. However, these new technology and staffing additions are also being coupled with a new set of responsibilities and expectations from business leaders that may place greater strain on practitioners. These heightened expectations were clearly evident in our research, with 77% of practitioners indicating their list of responsibilities would increase in 2023, while just 2% believed their workload would be reduced.
Regarding the nature of these new responsibilities, it appears that many treasury teams are being relied upon to execute and contribute towards more “strategic” internal functions. Based on the data, 57% of practitioners indicated that the strategic role of their treasury group would expand in 2023, while just 4% indicated a decrease. Going a step further, when asked whether treasury was viewed as more “operational” or “strategic” by management, practitioners were evenly split in their perspectives at 48% strategic and 52% operational, respectively.
Looking deeper into the growing influence and responsibility of treasury, another interesting finding was that most treasury teams seemed to exert heavy control over their company’s AP and AR operations, either directly or indirectly. On average, 69% and 67% of treasury groups maintained some level of control over these operations, with little deviation between companies of different sizes and industries.
Cash Forecasting is a Top Priority for Treasury in 2023
Although cash management and forecasting operations have long-been standard treasury responsibilities, data shows that practitioners have been placing an even greater focus on these operations over the past year.
Since early 2022, several major U.S. corporate treasury studies including AFP’s 2022 Strategic Role of Treasury Survey and Strategic Treasurer’s 2021 Treasury Perspectives Survey saw cash management, forecasting, and working capital projects ranked as top priorities for treasury teams. Our 2023 research corroborated these results with data showing cash management technology being the top priority for new software investments over the next year. In addition, cash management skillsets were listed as the most emphasized area of professional development focus for treasury teams in 2023.
Turning to cash forecasting, one primary focus of our research was learning more about the various forecasting workflows and strategies leveraged by treasury groups and companies of different sizes and industries. At a high level, we found that nearly half of survey respondents used a TMS to produce cash forecasts, with 20% leveraging an ERP and nearly 30% relying on Excel Spreadsheets. While Excel is still used predominantly by smaller teams, the use of TMS and ERP products was much more popular for companies with $500mm+ in annual revenue.
Regarding the preferred forecast horizon, 27% of teams focused on monthly forecasts, while 38% were prioritizing weekly analysis and 25% daily. Generally, smaller companies were only half as likely to conduct daily forecasts compared to larger firms, but 2x more likely to conduct quarterly forecasts. On the other hand, larger firms were more likely to conduct forecasts across numerous time periods including daily, weekly, and monthly. In aggregate, weekly forecasts were the most popular analysis period across all sizes and industries.
As a final point on forecasting and in-line with the broader digitalization shift that has been occurring in treasury for years, the top priority for practitioners when improving their forecast process revolved around either migrating away from legacy Excel-based processes or upgrading their existing software to achieve greater accuracy and automation.
To learn more about this research and for extended results and analysis, download the full whitepaper here. You can also watch our recent results webinar that features commentary on the key survey themes by a panel of industry experts.
Avoid the cliff and protect your cash flows! When volatility is at an all-time high, the right currency hedging strategy can set you apart. And save your business from an uncertain future. Transform your FX risk with a layered hedging strategy that will help you withstand unexpected changes in FX markets and protect your margins.
When implementing an FX hedging program, finance professionals responsible for risk management must be aware of the ins and outs of their business. This will be the starting point to uncover potential gaps in the hedging strategy and also opportunities to implement the program that fits perfectly.
Let’s understand how a layered hedging program works and how it could fit with your FX strategy.
Why is a layered hedging strategy important?
Layered hedging programs allow CFOs and Treasurers to handle the related problems of FX markets volatility, shifting interest rate differentials, and less-than-stellar cash flow visibility.
The goal of a layered hedging program is to smooth out the hedge rate over time to lower the variability of company cash flows. Additionally, a layered hedging program that is created from scratch can deal with the problem of forecasting accuracy.
Instead of ‘protecting’ an FX rate, layered hedging programs build the hedge rate in advance. And because hedges are applied in layers, in a progressive manner, you do not need a 100% accurate forecast at all.
Who can benefit from a layered hedging program?
Not all hedging programs are the same, as they tackle different goals for managing FX risk. Before you implement a layered hedging program and start dedicating time and resources, you need to think about certain conditions. These relate to your current business model -including pricing structure, the FX exposure you want to hedge, cash flows, etc.- and your company’s specific needs when it comes to FX hedging.
This type of hedging program is best suited for firms that need or desire to keep steady prices not only for one individual campaign/budget period, but for a set of campaign/budget periods linked together. In layered hedging:
(a) Prices are usually not FX-driven, meaning that the FX rate plays no role in pricing strategy.
(b) The impact of the ‘cliff’ -a sharp adverse fluctuation in currency rates between periods-, cannot be passed on to customers at the onset of a new period.
(c) The exposure to hedge is a rolling cash flow forecast for a set of periods linked together.
Unlike other cash flow hedging programs, like static hedging where prices are either frequently updated or updated at the onset of a new budget period, pricing does not act as a hedging mechanism in layered hedging programs. And that puts cash flows at risk, so a solution must be found elsewhere.
In comes the star of layered hedging, smoothing the rate.
Smoothing the hedge rate over time
The secret of achieving a smooth hedge rate over time is to create commonality between trade dates for a given value date. Take, for example, a 12-month layered hedging program. The value date of October is hedged in 12 different months, from October in the previous year down to September.
Next, the value date of November is hedged in the same manner, starting in November of the previous year down to October. And so on and so forth. Note that the two value dates -October and November- share eleven out of twelve trade dates with the same spot rate. That’s the concept of the mechanically created commonality that lies at the heart of layered hedging programs.
However, the process of ‘layering the hedges’ is not as simple as it may seem at first glance. There are some common challenges that Treasurers and CFOs face when manually performing FX risk management activities.
Common challenges in layered hedging
Before crafting the optimal layered hedging program for your business, there are three common challenges that need to be considered. These are crucial to the success of the FX hedging strategy. And they relate to the configuration of the program, the intrinsic constraints of the business, and the level of automation currently available to the team. Let’s take a closer look.
Configurations. Depending on risk managers’ secondary objectives, there are many possible configurations for a layered hedging program. Some of these configurations regard:
(1) The degree to which the hedge rate is smoothed, for example by adjusting the programs’ length.
(2) The optimisation of forward points. For example, hedge execution can be delayed if forward points are ‘unfavourable’.
(3) The distance between the average hedge rate and the spot rate.
Constraints. Each treasury team may face its own set of constraints, some examples include:
(1) The degree of forecast accuracy.
(2) Possible limitations imposed by liquidity providers who might not let a firm trade forward contracts that expire, say, more than two years out.
Automation. Needless to say, a manually executed layered hedging program can be pretty demanding, especially if many currency pairs are involved. We’ve seen companies running such programs with the help of enormous spreadsheets. This only creates two different operational risks:
(1) Spreadsheet risk, including data input errors, copy & paste errors, formatting and formula errors.
(2) Key person risk, as only a handful of individuals understand the formulas that underpin the ‘monster’ spreadsheets.
Eliminating the uncertainty
Layered hedging programs are a powerful FX risk management tool to face the trifecta of problems created by a highly volatile scenario. These hurdles include currency risk —including the risk of a cliff, as we saw recently with the GBP-USD exchange rate—, shifting interest rate differentials, and less-than-stellar cash flow visibility.
Now that you know the ins and outs of layered hedging, you can start transforming your FX risk management workflow. And forget about the challenges that may come when facing uncertainty. That’s a pretty powerful advantage in a scenario of pandemics, inflation and war!
Optimal hedging strategy with Currency Management Automation
If you want to leave behind the challenges of manual work when it comes to currency risk, consider implementing automation software.
Kantox is the only solution that streamlines the currency management process through powerful automation of the entire FX workflow. This enables businesses to reduce currency risk, protect profit margins and price more competitively.
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