BCR Publishing
We are the leading provider of news, market intelligence, events and training for the global receivables finance industry.
Working with industry leading organisations, experts, governments and universities, BCR Publications delivers expertise in factoring, receivables and supply chain finance to a global audience.
BCR has long been a beacon of innovation and excellence in the realm of receivables finance, playing an instrumental role in shaping the industry’s international landscape. Through its comprehensive conferences, insightful publications, and thought leadership, BCR has facilitated crucial dialogues and connections among industry professionals, driving forward the development of receivables finance globally.
Follow BCR Publishing
Free passes
For corporate treasurer roles/functions!
The Do’s and Dont’s of Pricing with an FX Rate
09-03-2022 | treasuryXL | Kantox | LinkedIn |
Give up your time-driven rules for pricing with an FX rate and go for a data-driven approach instead!
In this article, we are going to highlight the challenges faced by treasurers as they seek to manage pricing risk. According to Toni Rami, Kantox’s co-founder and Chief Growth Officer: “Understanding pricing is perhaps the most crucial element in order to design a great FXRM program
Credits: Kantox
Source
Click on the image above for the corresponding episode of CurrencyCast
Pricing risk
Pricing risk is the risk that —between the moment an FX-driven price is set and the moment it is updated— shifts in FX markets can impact either a firm’s competitive position or its profit margins.
The natural way to reduce it is to increase the frequency of price updates. After all, the price itself is a potent hedging mechanism. But that is not an option for companies that wish to keep steady prices during a campaign/budget period or during a set of campaigns/budget periods linked together.
We will discuss this situation in further articles. Today we want to highlight the shortcomings of the most widely used criteria for pricing updates: time-driven criteria.
Shortcomings of time-driven criteria
A time-driven rule to manage pricing risk consists in setting a time frame between the moment an FX-driven price is set and the moment it is updated. It can be every 24 hours, every week, every month. Quite obviously, the longer the time to the update, the higher the risk.
At Kantox, we are convinced that this approach is arbitrary, that it doesn’t protect you against FX risk, and that it does not reflect the business or financial needs of the firm. Take the 24-hour rule. Why not 23 hours or 25 hours instead? A time-based approach does not eliminate risk: a sharp move in markets can well take place inside a very short time span before prices are updated.
Another way to see this is that it makes it more difficult for the firm to react to favourable moves in FX markets. Take the case of a firm that prices and sells in EUR and buys in USD, using the EUR-USD currency rate as a key pricing parameter. A rise in the EUR could allow it to outsmart the competition by pricing more competitively without hurting its budgeted profit margins.
Failure to take advantage of this type of opportunity is a serious shortcoming in terms of pricing strategies, at a time when —according to consultants McKinsey— pricing is becoming a key strategic element in today’s competitive landscape.
The alternative: data-driven criteria
At Kantox, we believe that such arbitrary time-driven rules should give way to a data-driven approach that consists of setting boundaries around an FX reference rate, such that prices are updated only if the market moves beyond the upper and lower bounds of those boundaries. The system then serves a new reference rate and dynamically adjusts the upper and lower bands around it.
If FX markets remain relatively stable, then the firm can keep steady prices, something that is attractive in many B2C setups. This approach also allows treasurers to take advantage of favourable moves in currency markets while protecting budgeted profit margins, independent of when these movements occur.
How far or close to the reference rate these boundaries are set reflects risk managers’ tolerance to FX risk. In addition, the pricing configuration can be adjusted according to the goals of management in terms of:
While most Treasury Management Systems lack what we call a ‘strong FX rate feeder’, Currency Management Automation solutions —working alongside your existing systems— allow finance teams, among many other things, to set up an efficient data-driven solution to manage all the aspects of pricing with FX rates, including pricing risk.
Worried about your FX risk health? Take our free assessment and get a personalised insights report in minutes.
Interest payments – How to calculate the days
| 07-03-2018 | Lionel Pavey | treasuryXL | LinkedIn
Business day conventions | Modified Following
Preceding – the first preceding day that is a business day
Following – the first following day that is a business day
Modified Following – the first following day that is a business day, unless the days falls in the next calendar month, in which case the date will be the first preceding day that is a business day
Furthermore reference will be made to the applicable currency calendar for determining non-working days. For EUR this would mean TARGET, for GBP this would mean London, for euro USD this would mean London and New York.
Calculation basis
Actual/360 (Money Market) – the coupon payment is calculated using the exact number of days in the period divided by 360. The start date is included in the calculation, but not the last day.
Actual/365 (Fixed) – the coupon payment is calculated using the exact number of days in the period divided by 365. The start date is included in the calculation, but not the last day
Actual/Actual (ISDA) – the coupon payment is calculated using the exact number of days, with the portion of days belonging in a non-leap year divided by 365 and the portion of days belonging in a leap year divided by 366. The start date is included in the calculation, but not the last day.
Actual/Actual (ISMA) – the coupon payment is calculated using the exact number of days divided by the length of the year, where the length of the year is equal to the number of days in the coupon period multiplied by the number of coupon periods in the year.
30/360 (Bond basis) – the coupon is calculated over 30 days for every full calendar month and the actual number of days for the remaining fraction of a month, divided by 360.
30/360E (Eurobond basis) – the coupon is calculated on the basis of a year of 360 days with 12 30-day months, unless the end date is the last day of February, which is not lengthened to a 30-day month.
Coupon calculation conventions
Adjusted – Interest is calculated on the effective payment date adjusted for the business day
Unadjusted – Interest is calculated on the theoretical payment date, regardless of the effective payment date.
If you are interested to know what the effect of these changes can be on a coupon payment and calculation, please contact us for more detailed information.
Lionel Pavey
Cash Management and Treasury Specialist
Your new home for fixed income
07-03-2022 | treasuryXL | Refinitiv | LinkedIn | Your new home for fixed income