30-08-2022 | treasuryXL | Kantox | LinkedIn |

How should a CFO set their currency hedging strategy, to protect cash flows or to minimise P&L impact? In the fourth edition of CFO Perspectives, we’ll explore how senior finance professionals can choose the right path when it comes to hedging.

Credits: Kantox
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01-08-2022 | treasuryXL | Kantox | LinkedIn |

When managing FX risk, CFOs could learn a lot from the world of asset management, where a revolution —led by indexing— has led to huge gains for investors. But how can you apply this to your business’s FX risk strategy? Watch below the video, or read the article!

Credits: Kantox
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In the second edition of CFO Perspectives, we’ll draw from our work with CFOs to explore the parallels between asset management and FX risk. We’ll break down the processes and tools used in asset management which can be applied to your currency management strategy, with some spectacular results.

Over the last couple of decades, the world of asset management —an industry with $100 trillion under management— has been turned upside down by a quite unexpected revolution: indexing. Instead of relying on managers’ capacity to time the markets, these firms have automated the selection of assets by quietly replicating stock indexes.

Can CFOs lead a comparable revolution in currency management?

The answer is: yes, they can! Let us see why and how they can accomplish that feat.

Having embraced indexing early on, two leading firms have assets under management north of $15 trillion. What’s more, they have achieved such a spectacular result with fees that are only a fraction of the fees charged by those who embrace speculation. They have saved, and they are still saving, hundreds of billions in costs to investors.

Similar changes may be afoot in the business world. The term ‘exposure under management’, now used by CFOs and treasurers, comes from the expression ‘assets under management’. More importantly, CFOs are eschewing speculation — just like their cousins in asset management.

When managing currency risk in the one-trillion-a-day forward currency market, CFOs are using more and more digitised, automated solutions.

A random walk for risk managers

Once in a while, a lack of currency hedging or even speculating on an FX market move can yield a positive outcome for CFOs. But luck will run out at some point. Sooner or later, blindfolded by overconfidence, ‘speculative’ risk managers flounder in their vain attempt to time currency markets — with disastrous consequences for themselves and their companies.

Like stock prices and the price of other financial assets, exchange rates are not predictable. They follow ‘a random walk’ in which the forecast is set equal to today’s exchange rate (the spot rate). Accordingly, investors —and risk managers— should embrace markets rather than trying to beat them.

This is the thrust of the analogy between the asset management revolution and the coming revolution in FX risk management, an event that will ultimately enhance the strategic role of CFOs.

5 asset management tactics CFOs should borrow when managing FX risk

Let us go beyond the surface and take a closer look at the key tools and processes used by the most successful companies in asset management. These processes provide a useful template for understanding how CFOs will use Currency Management Automation solutions to manage FX.

We can single out at least five main lines of action:

1. Avoid timing the market. Nine out of ten of the so-called geniuses of the investment world have been ‘destroyed’, in terms of comparative performance, by the more modest index funds. Adding insult to injury, the latter have charged only a fraction of the fees. The no-speculation mantra has proved immensely successful in asset management. If one accepts the view that currency markets also follow a ‘random walk’, then there is no reason to expect a different outcome when it comes to FX risk management.
2. Achieve operational brilliance. Indexed asset managers know that their success relies on engineering products that achieve operational brilliance by taking the risk of human error out of the equation. Just as indexing is measured by the tracking error between a fund’s rate of return and that of its benchmark, Currency Management Automation is at its core an engineering product that uses Application Programming Interfaces to achieve great precision in currency hedging while allowing managers to seamlessly run the entire FX workflow.
3. Implement scalable solutions. Successful asset managers use platforms that provide scalability, which makes it possible to quickly and cheaply enter new markets such as bonds, commodities and others, almost anywhere and in many currencies. The same idea applies to FX automation, as CFOs are set to implement scalable, data-driven pricing and hedging solutions to enter new markets, enabling their companies to buy and sell in more currencies — with FX risk systematically under control.
4. Innovate with a purpose. Indexing is one of the few truly beneficial inventions, a technology that has saved investors hundreds of billions of dollars. Similarly, the purpose of automated FX risk management is to allow firms to confidently ’embrace currencies’, reducing costs to customers and ultimately enhancing the value of the business. When it comes to innovation, purpose matters (see: “CFO Perspectives: 3 ways CFOs can use currencies to boost their business’ value”).
5. Keep a foot in more than one camp. The world’s largest asset manager keeps a foot in both camps: active asset management and index funds. An entire platform provides a menu from which clients can select whatever financial slice they might fancy. Likewise, CFOs have at their disposal an entire ‘family’ of automated hedging programs and combinations of programs, including balance sheet hedging and a variety of cash-flow hedging programs that respond to their firms’ goals and pricing parameters.

Read the first edition of our CFO Perspectives series, 3 ways CFOs can use currencies to boost their business’s value here.

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.