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ARTICLES

What is the expected conclusion of crypto volatility for Corporate Treasury?

08-06-2022 | treasuryXL | LinkedIn |

A couple of weeks ago we launched a poll on our LinkedIn page about the impact of crypto volatility on corporate treasury. The poll received 72 votes in total, which is a great number! Thanks to everyone who joined the poll.

We thank François de Witte, Pieter de Kiewit and Carlo de Meijer for sharing their views with us.

What is the expected conclusion of crypto volatility for Corporate Treasury?

The votes which were given by Treasurers

View of treasuryXL experts

Francois De Witte

“There is a clear need for more regulation”

It is quite clear that cryptos present a high-risk profile. The volatility is high, and it is not easy to hedge these risks. In addition, payment transactions in cryptos take more time and energy than existing payments systems like the instant payments.

Currently, cryptos are held within the blockchain and are based upon a consensus. As a corporate, you do not have a control over these assets. In addition, you do not have the stringent KYC and AML checks which you have in the classic payment systems. The KYC and AML controls occur only on the moment that an individual or a company buys cryptocurrencies with its bank account or card, or when the proceeds of the sales of cryptocurrencies are paid to their bank account.

For this reason, there is a clear need for more regulation. Although the 5th AML Directive covers certain crypto assets under the term “virtual currencies”, it does not provide a harmonized approach. This problem will be addressed by the proposal of the EU Commission for the Regulation of Markets in Crypto Assets (abbreviated as MiCAR), which aims to create an EU framework for crypto assets falling outside the scope of other existing EU financial regulation and is expected to enter into force by end 2024. Let’s hope that this will bring more clarity in this complex topic.

Pieter de Kiewit

“Let’s see what will happen”

Rejecting crypto currencies or even blockchain before fully understanding the concept is like holding on tohorse and wagon when seeing the first cars. And current inflation following the QE strategy of the ECB shows that stability is not guaranteed in the traditional system. At the same time, treasurers are there to manage risk and the current crypto landscape seems very risky. So let’s see what will happen.

Carlo de Meijer

“Without well thought-out regulation, the inherent volatility of cryptocurrencies will continue to make stablecoins vulnerable to various risks”

Regulation of stablecoins has long been on the agenda of regulators worldwide. To date, however, the crypto sector in general and the stablecoin segment in particular remain largely unregulated.

Stablecoins continue to come under scrutiny from regulators, given the rapid growth of the $130 billion market and its potential to impact the broader financial system. As stablecoins are deemed increasingly important to the system by regulators, with the potential to disrupt payment and settlement transactions.

The recent collapse of stablecoin TerraUSD (UST) and the resulting fall of Bitcoin below the $28.000 level have provided an additional argument for speeding up the regulatory process and coming up with adequate regulatory measures.

With a growing number of traditional financial institutions, investors and also companies entering the Crypto and DeFi market, regulation becomes urgent to prevent such collapses in the future. Buyers need to understand the risks of these algorithmically stablecoins in particular. Therefore, standards are needed.

Without well thought-out regulation, the inherent volatility of cryptocurrencies in general but also of some types of stablecoins, will continue to make these stablecoins vulnerable to various risks, and make using these instruments for treasury purposes a difficult activity. The lack of transparency about what assets are being used and whether they have enough dollars to support all the digital coins in circulation also amplifies this consequence.

Closing Loops: Connecting FX Hedging and Cash Forecasts

08-06-2022 | treasuryXL | Cashforce | LinkedIn |

How one member uses Cashforce to save time and money on FX trades—and helped create an automated hedging process.

One assistant treasurer at a recent NeuGroup virtual interactive session said that her primary project for 2021 is “to make treasury as no-touch as possible.” This is a common theme for treasurers recently, though it’s not always clear where to start. Her first step was to seek potential connections in existing processes and platforms—which led to an overhauled and streamlined process for foreign exchange hedging.

The member already was using Cashforce, a fintech that allows deeper analysis of cash flow, to assist in cash flow forecasting, and saw potential in connecting it to Citibank’s CitiFX Pulse platform through the company’s TMS.
Through collaboration with Cashforce, Citi and her TMS, she was essentially able to turn the company’s hedging policy into an algorithm that reads the forecast and will potentially execute or propose trades all on its own.

From forecasts to forex. The member said this is only possible because Cashforce can forecast at a high level of granularity. The AT said she was “really lucky” that the tools work together so well.

“The forecast at that level of detail is a forecast in document currency,” she said. “And because I can have forecasting at nearly an invoice level, I know what that currency is going to be.”
Through the forecast, she said, the company is able to see what its FX position is going to be. “Then if I layer over what hedge I might already have in place, it will be able to tell me what are my gaps,” she said.
“The idea is to send it out so that we could auto-trade to fill the gaps below a certain threshold, let’s say 100 grand or less, and review above that just to check the data before we trade.”

A closed loop. Nicolas Christiaen, Cashforce’s CEO, said that, before this project, the member’s process was “very disconnected,” but all it took was connecting the dots.

“On the data input side, the ERP, TMS, P&L and bank statements are now put through [Cashforce’s] transformation layer, which results in a cash flow forecast,” he said. “As is very specific in this case, it’s a forecast by currency, by month.”
Currently, the company then uploads this forecast back into its TMS for review, and manually executes FX trades based on the company’s hedging policy.
“When these hedges are executed, the hedge amounts will pass back into Cashforce via the TMS, closing the loop,” Mr. Christiaen said.

A step further. With the proposed system that the member has designed with Citi, the company could include its hedging policies as a rules-based program in CitiFX Pulse that can read this forecast.

It would then “put in place the instruments used for the hedges for the thresholds that need to be taken into account,” Mr. Christiaen said. “Which ultimately results in a proposal.”
The chart below demonstrates the vision: As the data feeds into Cashforce, which outputs a forecast, that forecast is reviewed by the member and uploaded to CitiFX Pulse, which can automatically execute or propose FX hedges.

Constant change. Automation is “an awful lot to bite off,” the member said, and recommends starting slow on this kind of process:

The first step is to test what systems you already have. “A lot of us have pockets in the organization of different systems that can be leveraged. Some of them can’t do what they say they can or aren’t quite what you need—but sometimes you get lucky, as we did.”
- She said it is also an opportunity for treasury to work with fintech partners to build exactly what it needs.
Collaboration and clear communication with IT is “super important,” which she learned the hard way. “Despite really clear instructions from Cashforce on the size of server we would need, [IT] gave us a quarter of that size and we now need a bigger size,” the AT said.
She warns that, although automation opportunities are promising, it’s not always smooth sailing. “Be aware of the opportunities, but also be aware of the work: automation is doable but takes an awful lot of time.”
“As the business changes, the structure changes as well,” she said. “The only constant within treasury is change.”

Article originally published by Neugroup here.

Option Tales : Cheap Options part IIII

| 07-06-2016 | Rob Söentken |

Today in the closing part of Rob Söentken’s Option Tales: When buying options it is tempting to see if the premium expenses can be minimized. A number of solutions are possible, which I’ve discussed in four articles. You can read about choosing the average rate option (ARO) and the conditional premium option in my previous article. In this closing part I will discuss the Reverse Knock Out (RKO) option.

Reverse Knock Out (RKO) option

One of the most common options used as alternative to a vanilla option is the Reverse Knock out option. It is a vanilla option which ceases to exist after the underlying reference rate has traded through a certain level, the ‘trigger’ or ‘KnockOut’. This trigger event determination can be either

only at maturity (‘European’ trigger monitoring),
during the entire tenor (‘American’ trigger monitoring),
during on or more parts of the tenor (‘window’ trigger monitoring), or
on specific moments during the tenor (‘Parisian’ trigger monitoring)

The term ‘Reverse’ means that the option has been ITM before the trigger was hit. Just when the option was starting to make money it ceases to exist after the market touches the trigger. Unlike a vanilla option the value of an RKO is capped by a potential trigger event. Therefor RKOs are a usually a lot cheaper than vanilla options which have unlimited value potential.

In diagram 6 an example is given of a 12-months USD call option costing 1.5%. Alternatively, one could consider buying an RKO option with same tenor and strike, with a European Knock Out trigger at 12.4% OTM. This costs 0.9%. There is only 8% chance the market is below the trigger at maturity. (The Delta of a vanilla option is 8%, which is also the chance of being below the strike at maturity). Therefor there is only 8% chance that the RKO expires worthless. Which could be a dramatic result for a hedge, especially considering the USD has appreciated by more than 12.4%, making the actual hedging cost showing a big loss. For a premium saving of only 0.6%.

So, to minimize premium expenses when buying options there are seven solutions to think about:
1. Choose Out of The Money strike (OTM)
2. Choose Shorter Tenor
3. Choose Longer Tenor
4. Compound Option
5. Average Rate Option (ARO)
6. Conditional Premium Option
7. Reverse Knock Out option (RKO)

Rob Söentken

Ex-derivatives trader

BCR Publishing

We are the leading provider of news, market intelligence, events and training for the global receivables finance industry.

Follow BCR Publishing

ARTICLES

What is the expected conclusion of crypto volatility for Corporate Treasury?

What is the expected conclusion of crypto volatility for Corporate Treasury?

View of treasuryXL experts

“There is a clear need for more regulation”

“Let’s see what will happen”

“Without well thought-out regulation, the inherent volatility of cryptocurrencies will continue to make stablecoins vulnerable to various risks”

Closing Loops: Connecting FX Hedging and Cash Forecasts

Option Tales : Cheap Options part IIII

Reverse Knock Out (RKO) option

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