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What’s the Best Way to Exchange Your Currency for a Trip Abroad?

17-09-2020 | treasuryXL | XE |

Got an international trip coming up? Need to make a currency exchange? Let us talk you through your options.

When you’re preparing for an international vacation, there’s a lot you need to remember to bring. Between your passport, enough clothes, adapters, it’s easy to fill up a few bags with just the essentials. However…it’s also important that you don’t forget to bring some money to use on your trip. Odds are, if you’re traveling internationally, you’ll need to make payments in a different currency. What’s the best way to get the money? When should you make the currency exchange?

You have a few different options for exchanging your currency. We’re going to run through your options and let you know what the best option is and what you should do your best to avoid.

4. Using ATMs and card payments

Technically, you don’t need to make any currency exchanges. If it comes down to it, you can just go to an ATM or use a debit or credit card to make your payments. But while this option might sound like the most convenient one (at least as far as your time is concerned), it’s far from the best option.

When you visit ATMs or use your card to make payments in another country (and currency), you’re going to be subjected to numerous service fees and transaction fees each time you withdraw cash or swipe your card. If you’re there for a short time and only plan on making one or two payments that might not be so bad, but if you’re planning on making numerous purchases, these fees can and will add up—fast.

3. Exchanging in person at your destination

Another common option is waiting until you enter the country, and exchanging your currency there. People typically do this at the airport or at a local bank or currency exchange store.

While this method will let you avoid the high transaction fees, it unfortunately will not protect you from unfavorable rates of exchange. These providers are free to set their own rates, and it is very likely (especially if you’re exchanging at an airport kiosk) that the rates will give you much less for your money than if you transfer elsewhere.

And from a peace of mind perspective, wouldn’t it be nice to have your money taken care of before your arrival? That way, once you arrive, you’re free to start exploring or take a rest, without having to worry about getting money on top of wrangling your luggage and figuring out how to get to your lodgings.

2. Exchanging at the bank before your trip

As we mentioned in the previous section, it’s always nice to have your currency exchange taken care of before you reach your destination. It’s one less item to have on your to-do list when you arrive, and then if something happens upon arrival, you’ll already have the money that you need.

While banks are reliable, easily accessible, and can facilitate a currency exchange for you, they still aren’t the best option. While their rates will be better than those of airport kiosks, banks still come with a few drawbacks—namely, limited working hours, unfavorable exchange rates, and transaction fees.

So where does that leave us? Well…

1. Using money transfer to get currency before your trip

We promise we’re not biased—this really is the best option. Using an online money transfer service to exchange your currency before your trip will allow you to:

  • Avoid transaction and payment fees

  • Trust you’ll get a fair exchange rate

  • Take care of your currency exchange quickly and from your own home

  • Let you relax knowing that your currency exchange has already been handled.

It’s quick and easy to make an online money transfer. You don’t need to find a physical storefront and worry about business hours—you can initiate one on the go, 24/7, 365 days a year.

 

 

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

 

 

 

Signs Your Foreign Exchange Provider Isn’t Right for You

10-09-2020 | treasuryXL | XE |

Every business is different, and so is every foreign exchange provider. How do you know whether your provider is right for your business’s circumstances? If you’ve been keeping up with our blog series on managing your company’s foreign exchange risk, you’ve likely seen us give one consistent piece of advice throughout the process: have a foreign exchange provider. Working with the right foreign exchange provider can help you reduce your business’s risk levels and improve the efficiency and efficacy of your international payments and other foreign currency dealings.

However, not every foreign exchange provider is the right foreign exchange provider. A provider can be knowledgeable, experienced and provide great customer service, but none of that matters if they don’t have the knowledge, experience, and service offerings to suit your business, its operations and its risks.

Not sure how to spot the right (or the wrong) foreign exchange provider? There are a few key qualities that you should look out for as you shop around.

What’s one of the biggest issues with foreign exchange providers?

One common problem that we see keeping businesses from effectively managing currency risk and securing the best value from transactions is a lack of flexibility. If your foreign exchange provider doesn’t offer enough flexibility in their terms, you’ll be limited in terms of what you can do.

Take hedging, for example. For some businesses, hedging would be a wise strategic decision, but not all providers offer a variety of options. You may be asked to make payments in advance or provide margin for forward positions, and not all companies are able or willing to do so. Even if your business is willing to meet a provider’s terms, they might not be best suited to your circumstances.

On the other hand, other providers could offer a wider range or more flexible credit terms that would account for your business’s needs.

What should you look out for?

We recognize that telling you to look for “flexibility” is a little too vague. When speaking with foreign exchange providers, take the time to discuss their solutions and strategies in detail and understand how rigid their processes are. Understand your business’s processes as well—this will help you to in turn know what to look for in a foreign exchange provider.

Let’s look at payment service, for example. When working with international currencies, it’s likely that you’ll need to make quick payments to different recipients in different markets, while still having plenty of time to make your transactions and ensure that everything is correct. Some foreign exchange providers may only offer one form of payment service. That could work well for them, but it could also be inconvenient or detrimental for your business. Ask your provider whether they offer different payment options, or if there’s any way to configure their existing model to fit your business.

Ultimately, you want to find the provider that can and will adjust their strategies and solutions to fit your business. Whether you’re looking for assistance with your day-to-day transactions or your long-term risk management strategies, it’s important that you feel that your provider understands your business and is offering the solutions that will best address your goals, rather than a standard one-size-fits-all solution.

 

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

 

 

 

How to Find the Right FX Provider

03-09-2020 | treasuryXL | XE |

In this final installment of our blog series on foreign exchange risk management for your business, we address one of the most important steps in developing an effective risk management strategy—> finding your FX provider.

As we close out our blog series on improving your business’s foreign exchange risk management and avoiding costly mistakes, it’s come time for us to answer one last lingering question, the question that’s had a recurring presence throughout our blog series.

How do I find the FX provider that’s right for my business?

It’s a question that’s come up throughout our series of blogs. From avoiding inflexible solutions to taking care of tricky regulatory compliance, nearly every piece of risk management advice has come down to finding the holy grail FX provider, the one that understands your business and its operations and has the expertise and solutions to address your unique risks.

Now, we’re finally going to talk about how to find this perfect provider.

The importance of shopping around in foreign exchange

The biggest mistake you can make in your search for the perfect provider? Not searching at all.

It can be tempting to just stick with your friendly local bank, or go with the first provider you speak with just for the comfort of having a dedicated provider. But you don’t want to do that. Keeping a narrow focus (and not shopping around) can lead to you missing out on:

  • Better exchange rates

  • Better or more varied service opportunities from working with a specialist provider

  • A more targeted, strategic approach to your foreign exchange.

Now that we’ve established that you should be exploring your options, it’s time to start shopping. But where do you start? What kinds of things should you be keeping an eye out for in your search?

What should you look for in your FX provider?

Ultimately, the right FX provider for you will be the one who can help you to streamline your business operations to make international payments while minimizing regulatory delay, human error, and risk exposure. In order to do that, they’ll need to understand your business, understand what you do, and be able to work with you to directly address your risks and other issues without compromising your business in the process.

When meeting with providers, we encourage you to keep an eye out for (and ask about) the following things.

  • Competitive, but realistic solutions. Don’t fall for the hype. If an exchange rate sounds too good to be true, it almost certainly is. Additionally, some providers may encourage you to speculate in the currency markets or tell you that they can help you to second guess rate movements. In reality, it’s impossible to know how the markets will move, and you should be wary of anyone claiming that you will always be on the right side of market motion.

  • A provider that understands your needs. You shouldn’t be the only one asking the questions. Your provider should be doing everything they can to understand your business, what you do, and how you do it. A provider that doesn’t take the time to learn about your business will not be able to offer the quality of service that you’re looking for.

  • Bespoke solutions to fit your needs. Continuing from that last point, a provider that only offers a generic service will only be able to provide generic protection. As we mentioned in our article last week you should look for a provider with solutions that meet all your foreign exchange needs, including helping you to manage future risk more effectively. Don’t settle for anything less.

 

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

 

 

 

The global FX market, do you want to be a part of it?

02-09-2020 | Niki van Zanten

The straightforward answer is ‘No’. Unfortunately, saying ‘No’ does not imply that you don’t play a part in the global casino named: The FX market. It could be a sane procurement, sales or investment decision that brings you a seat at the table. Unless you are a in this market to make commissions or in some rare instances a (successful) prop trader, you will most likely lose more then you gain when willfully playing the game.

The FX market is by far the largest market in the world easily exceeding equity, bonds markets or any other asset class. Estimates in daily turnover are north of 6 Trillion USD. The vast majority of trades have a USD leg and EUR is coming at a good second place making EURUSD the most traded pair. Comparing this to the Global Domestic Product (GDP) of let’s say 140 Trillion USD as a ballpark figure, the FX market monthly turnover exceeds the world’s annual GDP. Taking into account that not all global GDP related transactions in the world have a FX component, this tells us that a large percentage of the FX are not real money flows.

So what are they? For a part these are institutional investors like pension funds. Pension funds can choose to allocate in different currencies, but the more likely explanation is that a large part of the FX transactions are of a more speculative nature. Hedge funds for instance do not have a functional or group currency and therefore can freely take currency decisions when allocating assets.
So in summary, the largest market place in the world is driven by forces which are extremely difficult to predict by any form of scientific research or even looking into economic data like monetary flows. Not to imply that economic indicators and central bank policy don’t have its influence, but in the end, a market is primarily driven by supply and demand and there is vast speculation in buying and selling of currencies.

Switching to the corporate point of view, companies usually don’t want to be a part of the FX market. It’s the same story as you might wish to procure and/or sell in different currencies than your own for a variety of reason. It’s an open door to mention that this can be very beneficial but all cost need to be factored correctly before taking a decision. With Foreign Exchange this can be a difficult task and considering what is mentioned above, the FX market does not actually make things look better.
A basic example of why it’s hard to get a grip on the currency markets is available when looking at CNH (offshore RMB) forward markets in 2015 and 2016. Although there are structural differences between CNH and CNY in both spot and outright forwards, typically the pricing is at comparable levels (for the majority of us, at least the large China interest does not apply this). Yearend brought a liquidity squeeze and the forward markets showed huge spikes in volatility as well as extreme differences between the CNH and CNY yield curves. There are many more stories like this to share and recently even G10 doesn’t seem excluded from Emerging Market (EM) like volatility, particularly when looking at Brexit and the Swiss Franc peg release of January 2015.

So a few basic assumptions can be helpful when participating in the FX market for real money requirements

• Don’t think you can predict or beat the market
• Price in risk
• Risk can go both ways but spreads are by definition a cost
• If you choose to hedge make sure you get your exposure right and hedge to mitigate this exposure (in other words don’t use derivatives which don’t offset the hedged item)
• Be aware there is a difference between advise on a financial product and actually risk mitigation on a more holistic basis
• It’s hard to beat years of market experience, don’t hesitate to reach out to seasoned professionals who will prevent you from making expensive mistakes

Hope this was a good read and for any questions or feedback please share and keep things interactive.

 

Niki van Zanten

FX specialist

 

Xe-Pert Webinar Market Movers: Currency Influencers with Jason Schenker

| 27-08-2020 | XE.com

Webinar and Q&A | Thursday September 10, 2020 at 4.00 pm BST / 10 am CDT

As we approach the last quarter of 2020, join the Xe team and Market Futurist and Economist Jason Schenker, as they provide their thoughts on the current market outlook for the remainder of the year.

There are a number of key planned events happening over the next few months which could impact the currency markets in the United States and Europe, these include; the Presidential Election in the US, trade agreements and Brexit negotiations. With a continued focus on economic recovery as the markets react to a possible ‘second wave’ of Covid-19, the latest Xe webinar examines the potential scenarios and outcomes from these events and how businesses that have a commercial exposure to the currency markets can look to protect their bottom line from further impacts and protect against uncertainty.

About Jason:

Jason Schenker is the Chairman of The Futurist Institute and the President of Prestige Economics. He has written two-dozen books on emerging technologies, business strategy, finance, and the economy. Bloomberg News has ranked Jason the #1 forecaster in the world in 25 different categories, which is why executives, corporate boards, industry groups, and central banks rely on his financial market research.”

 

 

 

Date, time and registration

Date: September 10, 2020

Start time: 4.00 pm BST / 10 am CDT

Register here

 

Do you a question that you’d like one of the XE Experts to answer during the session? Please provide details and XE will endeavour to respond during the session. You can submit your question at the registration page.

 

 

Financing and FX; The fundamental concepts

10-08-2020| Niki van Zanten

Each field of expertise has some fundamental concepts that the decision makers tie to as general rules of thumb. For example, a purist chef might stick to a maximum of 5 ingredients on each plate, a winemaker might say only grapes and nothing else, and another winemaker might say any trick goes as long as it feels the wine.

The treasury purist might say the fundamental concept that should be applied and/or benchmarked is to get as close to a zero sum game as possible. I personally tend to agree with this concept, taking into account it’s not a pure mathematical equation. A zero sum game in Treasury would mean looking beyond one pillar of treasury (I would even recommend to look beyond the treasury scope once in a while and why not, even look beyond scope of just your company), and thereby combining the outcomes of a solution across multiple pillars and see if they balance out.

Today we will take a stab out doing that for FX and Financing. Below topics give some insights in when to apply and what to look at for:

  • External Financing in Foreign Currency
  • Internal Financing in Foreign Currency
  • FX swaps
  • Conclusion

External Financing in Foreign Currency

Interest rates not only fluctuate but also have different (base) interest rates per currency/country. In general, the all in interest for financing consist of a base rate for a certain tenor and the bank spread based on perception of customers credit. At first glance it might seem interesting to look at financing in a low interest rate currency.

A few years ago many home owners in Poland used EUR mortgages to fund their homes reducing interest cost by a few percent. This of course is not a saving, even though the interest cost were lower, in return they received a FX risk on EURPLN. In case a forward (sell PLN buy EUR) would be used to eliminate the FX risk it would not only wipe out the interest benefit but also bring additional burden in terms of administration, settlements and understanding the complexity of the structure. One of the complexities of the forward is even a credit component, so the point here is, in order to really see the zero sum game picture and its leakage (spreads, out of pocket expenses etc) things can get tricky.

Internal Financing

In most scenarios internal financing is a pass through and in principle it works the same as external with a back to back leg (albeit in a netting scenario). It does open a new array of choices. The more basic choices to put the (internal) FX risk, which tenors to use, accounting classification and perhaps even do everything back to back with a bank or take some risk on the books. In terms of currency and where to put the FX risk, the most straight forward option is to use the currency is which the predominant cash flows occur. You can also choose to centralise all your FX exposure at HQ but this could cause the accounting books to look different then the economics. In any case, with any back to back transaction in general the golden balance sheet rule should apply, ie duration and conditions internal need to match external, unless you choose to have risk on your books.

FX Swaps

FX swaps (buy and sell currency for different value dates) are commonly referred as FX instruments, but in my view they are pure financing instruments. They can be used to hedge the FX on a loan or to adjust timing of cash flow or related hedges which are both financing related issues. When a swap is executed to spot reference on both legs is equal and therefore the pricing is pure interest based. Swaps can be a great way to fine-tune interest rates as forward prices tend to be closer to interbank then to manage through typical cash management products like loans and deposits. The trade-off can come in the form of a little extra work and basic knowledge is needed, but I would argue the same understanding is required when using a bank solution which has swap incorporated such as cross currency pools.

Conclusion

The FX market at first sight provides an excellent way to obtain close to interbank interest rates. Use it wisely and make sure you have a deep understanding of the situation. There are also many good reasons to choose a simple “plug and play” solution when looking at financing elements. As always, if you care about your funding and cash flow the understanding required for keeping it simple is no different than the understanding required for an outsourced (bank provided) solution. So either way, don’t do what you don’t completely understand. A chat with an expert and/or asking the right questions to your banking partners (don’t be shy to ask for the motives of the solution that is offered) will get you on the right path.

I am curious about your thoughts. Please comment…

 

Niki van Zanten

FX specialist

 

Going Cash-Free: Is it Right for You?

09-07-2020 | treasuryXL | XE |

Let’s try something. Reach out to your friends, family, or roommates and ask if anyone has $50 they could loan you. Did anyone have that much money on them? Or did they say that they needed to go to the bank, or ask if they could electronically transfer you the money?
In recent years, it’s become increasingly common for people to not carry cash around with them, or to just carry a little bit in the case of emergencies. While there are exceptions, the majority of consumers have moved to using their credit and debit cards and other forms of electronic, cashless payment.

At the end of 2019, 70% of consumers in a survey answered that they preferred card payments to cash, with 38% of card users citing inconvenience as the main reason they preferred cards to cash. And it’s not just consumers who are looking to go cashless. Corporations like Starbucks, Sweet-green, and even Amazon have all implemented cashless measures at their physical locations. Whether you’re tired of the inconvenience of cash, want to keep track of your transactions, or you’re worried about the possibility of your cash carrying germs, you may be considering taking your payments completely cashless. Let’s take a look at what that could mean for you going forward.

Why go cashless?

Many people around the world have enjoyed the benefits of transitioning away from cash and toward electronic payment methods. These are some of the most popular reasons for making the switch:

  • It’s convenient. No more lugging that heavy wallet around, and no more digging around trying to find the right bills. If you’re short on time and want a quick transaction, all you need to do is swipe a card.
  • It leaves a paper trail. Does anyone keep a record of every single time they pay with cash? When you pay electronically, on the other hand, you have a built-in record of everything you’ve purchased, when you purchased it, and how much it cost. If you’re trying to budget, this makes it easier for you to see exactly how much you’re spending and where your money’s going. Or if your balance is lower than you expected, you’ll be able to see where the money went—or if your account information has been compromised.
  • Some cards come with benefits.From discounts to rewards, cash-back points, airline miles, and more, using your card frequently now could bring you a lot of benefits in the future.

Why you might want to keep a little cash

Even as technology continues to advance, it’s not likely that cash is going anywhere anytime soon. 88% of surveyed consumers stated that they still use cash sometimes, and here’s why:

  • Data security and privacy are a concern. With technological advancement comes new data security worries, and the world of payments is not an exception. E-commerce sites can be breached, and card information can be stolen. Or, after buying online, you might start seeing targeted advertisements based on your purchase and search history.
  • Cashless payment isn’t always a guarantee. Some vendors (particularly smaller, local businesses) only take cash. Or if they accept card payments, they might have a required minimum or add a small additional service fee to the transaction. Or maybe a store or restaurant’s card reader could go down for the day, and you’ll need to find an ATM. It might be small now, but these fees can quickly add up—and your card might end up being more of an inconvenience in these establishments.
  • You could spend more! When you have cash in your wallet, it’s easy to keep track of how much you have left, and how much you’ve spent. When all you need to do is swipe your card, it can be easy to lose track of what you’ve purchased and what’s left in your account.

Could my cash be contaminated?

In the wake of the global COVID-19 pandemic, this has been a question on everyone’s minds. Can cash carry the virus? Which payment method is the least likely to put you at risk of cross-contamination?

You’ve been told to try to avoid coming into contact with high-touch surfaces (such as door handles, handrails, and tables). Since cash frequently changes hands, you might be worried about the chances of your money carrying some harmful germs.

It’s true: coins and bills can potentially carry viruses, bacteria, and other pathogens. It’s not the most common method of transmission, but it can potentially happen. If it gives you peace of mind and makes you feel less anxious about the possibility of cross-contamination, prioritize electronic payment and card payments, since your credit and debit cards can be wiped down. If you do need to handle cash, wear gloves if possible, and always wash your hands after coming into contact with new, potentially infectious objects.

In conclusion…

From buying a house to transferring money overseas, there are a few situations where paying with cash obviously isn’t the best move. If you enjoy the convenience of electronic payments and want to make the transition into a completely cashless lifestyle, you’re not the only one ready to make the switch. As long as you know what works for your purchases and your lifestyle, there’s no reason not to explore alternate methods of payment.

Source

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

 

 

 

Accounting for FX; the Do’s and Don’ts

08-07-2020 | Niki van Zanten

Let’s start by mentioning a phrase that I hear regularly and, to be honest, also use myself: ‘I am not an accountant, but…..’.
The urge to mention this phrase (usually targeted to an accountant while having an ‘I know it better’ attitude), can perhaps be traced back to the following reasons:

  • Discrepancies between accounting and real economics;
  • The fact that some (from my perspective, way too many) companies are run by accountants and numbers;
  • Historically absurd requirements in terms of hedge accounting*.IFRS on paper brought some relief but the old FAS and IAS standards were over the top accounting driven without a mere grasp of the real world.

The first point could already result into great discussions. As companies are expected to adhere to certain accounting standards, these standards represent the objective part of these discussions. This results in real economics claiming an underdog position.
If companies have to choose between compliance on one hand and doing what works best economically on the other hand, the way to find the right balance is by training accountants about real economics. Many individuals working in treasury have an accounting background, which could be beneficial if that individual takes the economic approach and uses accounting knowledge convince business partners.

Let’s jump into some basic examples where accounting doesn’t reflect economic reality:

  1. IC (inter company) bookings where the transaction is not reported in the same currency at both ends

Entity A (EUR Functional) has a receivable of 1 Mio EUR and entity B (USD Functional) has a payable of 1.1 Mio USD. The Historic rate was 1.10 and cash flow occurred in USD. Entity A decided to book in EUR to avoid any FX reporting. The consequence is that there is indeed no FX exposure visible. However upon settlements all FX results suddenly appear.What a nasty surprise!

  1. Re-measurements not done at correct rates

The best indication for FX effects in your books is obtained when the applied rates are close to the market rates. As you know there are many different sources for markets rates.  The awareness of this fact is not visible in accounting.

  1. Forward points not segregated

If you do not segregate forward points in PL, you can have FX results when the currency in question does not move. That just sounds very strange to me and this also touches upon a bigger issue, namely the allocation of result on PL. In the case your FX does not land in a segregated PL line, or worse non-FX related results end in your FX PL,
this usually does not change the total PL. However this makes it extremely difficult to control FX results, as you need good exposure information as well solid controls in terms of realized results. Segregation of realized and unrealized FX is also a very helpful tool for the Risk manager.

Are companies run by accountants?

That question should be discussed over a beer or glass of wine. Right now, I will limit myself to some pointers on how to identify whether a case could be identified as an accounting issue or economics issue. It is actually very simple and should be done by treasurers and financial controllers, before any discussion occurs on what the actual problem is.

By comparing the accounting steps for each of the proposed solutions with the trades, you can identify where market risk arises and where accounting risk. The one can see that thes are not always the same. Furthermore, it might also be a good time to call for a specialist, if the right level of comfort is not met. This way of working also fits well with the absurd requirements of hedge accounting.

Regarding this topic, ask yourself whether you really need to apply hedge accounting. From my experiences, in most cases hedge accounting is applied only for one reason; to reduce the PL volatility in between hedging and the moment of cash flow for forecasted transactions. (especially true for listed companies).Taking an economic perspective, there is no benefit in hedge accounting at such a significant cost in terms of audits and administration . Hence, determine how high the cliff is, before you dive down into hedge accounting procedures.

Conclusion

In a perfect world with only blue skies and where work consists of having margaritas on the beach, there are no accounting requirements (and probably also no FX to manage). In our world, the same feeling can be obtained by making sure that the accounting for FX reflects economic reality as much as possible. Thisby applying the accounting standards as a framework. Furthermore  take into account what level of known discrepancies between the economic and accounting reality you are comfortable with.

*Please note hedge accounting and accounting for FX are not the same. By accounting for FX I mean the accounting entries done by non-local or group currency items. These can be invoices in different currencies or intercompany bookings. Hedge accounting is only linked to deferring derivative MTM on the balance sheet as opposed to PL immediately.

I am curious about your thoughts. Please comment…

 

Niki van Zanten

FX specialist