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!
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
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
Are There Risks to Conducting International Business in USD? Part 2: Importer and Exporter Scenarios
06-08-2020 | treasuryXL | XE |
In the second part of our blog series on transacting international business in USD, we take a closer look on how it can impact importers and exporters.
American companies continue to turn to international trade as a preferred method for growing sales or controlling costs. According to 2019 World Trade Organization data, international trade comprised 25% of the United States’ GDP, split between $3.1 trillion worth of imports and $2.6 trillion in exports.
Despite one-quarter of the U.S.’s GDP coming from international business, many American companies continue to transact all their international business in USD.
Why is this?
One primary reason is that certain industries have USD-functional supply chains – such as aspects of energy, agriculture and aerospace – have USD functional supply chains. Transacting in a foreign currency could be introducing FX risk.
However numerous other global industries are not USD-functional, and many American companies still choose to transact in USD.
Industry surveys reveal that two of the most common reasons cited are either:
A lack of FX risk awareness at the company
A management decision to transact in USD as this is easiest for their business.
Unfortunately, these decisions often result in the unintended consequence of transferring FX risk.
Keep in mind all international cross-border transactions, when the two counterparties have different functional currencies, have FX risk, even if priced in USD. One party must bear the FX risk and when an American company requests to transact in USD, that company is transferring the FX risk to the counterparty.
The Real Cost of Transacting in USD
To quantify the “cost” of transacting in USD, we’ve considered two trade scenarios:
A U.S. importer transacting in USD with both a Chinese and European supplier
A U.S. exporter selling in USD to both Chinese and European customers
Looking at the 2-year EURUSD and USD-CNY charts below, the Chinese Yuan varied 12% against the USD and the EUR varied 10.2% versus the USD. This variance is the “cost” transferred to Chinese and European companies and it impacts both importers and exporters.
A Deeper Dive into Importers
U.S. importers cite many reasons for choosing to transact their international business in USD. Each of these reasons has merit and may be appropriate for a company’s unique situation.
Industry standard: certain industries have USD-functional supply-chains.
Ease of doing so: “we’ve always done it this way”.
No other options: a lack of multi-currency accounting systems.
Supplier’s choice: the supplier says it wants USD.
First-time global trader: pricing in USD to focus on other trade risks.
Regardless of the reason, it does not alter the reality that:
Paying for imports in USD to a foreign supplier that is not USD-functional is transferring FX risk to the supplier, and
The supplier will need to be compensated for taking on the FX risk, most likely padding their USD price.
To illustrate the FX risk impact, the grid below shows the local currency impact of a USD payment to the Chinese and European suppliers.
Did this FX risk impact the pricing the American importers received?
Many importers report that their suppliers often change their USD prices—some say frequently—and almost always increase them. The most likely reason is FX. The supplier, converting the USD payable to local currency, is no longer receiving enough CNY or EUR to maintain their margins—thus, they ask for more USD. This most often happens when the USD weakens.
What Can a Company Do?
Many companies have adapted to this reality about FX risk even when paying in USD.
Some of the solutions we have seen in the marketplace include:
Companies asking for dual-currency invoices
Proactive companies paying suppliers in CNY or EUR, even if they are invoiced in USD
Companies asking for FX risk-sharing agreements
Companies embracing FX risk management and requesting local currency invoicing
A Deeper Dive into Exporters
Exporters also face the inherent FX risk in global trade as their end customers are most likely not USD-functional. Nonetheless, many U.S. companies still price their exports in USD. The most common reasons cited for this include:
Industry standard: i.e. USD-functional supply chain
No other options: accounting/ERP systems not multi-currency compatible
Convenience: ease of doing business to the American company’s staff
Again, regardless of the reason cited, it does not alter the reality that a company pricing its exports in USD is transferring the FX risk to the buyer. The buyer experiences the variability in the FX spot rates and will most likely:
Demand price discounts, or
Choose to buy from a competitor willing to price in their home currency
The grid below illustrates the FX risk impact transferred to the Chinese or European buyer over the last two years by the American exporter, as a result of pricing in USD.
Has this FX risk impacted your sales or revenue forecasts?
Many exporter sales staffs know that pricing in USD is often uncompetitive. Their biggest risk is a strengthening USD as this makes their product or service more expensive. An exporter’s sales management must weigh the costs versus benefits of transacting in USD. The risks are:
Uncompetitive pricing: a stronger dollar makes their product or service more expensive.
Payment delay risk: customers that don’t hedge may try to wait for the FX rate to improve.
Profit margin risk: sales teams may need to cut prices to close the sale.
Lost sales revenue: buyers may choose a similar product or service from competitor willing to price in local currency.
What Can a Company Do?
Many companies have recognized these market conditions and taken actions to adapt to their international customers’ needs. Strategies have included:
Offer pricing in local currency and take on management of FX risk
Offer hedging on behalf of suppliers that cannot
Offer risk-sharing pricing agreements
Open local sales offices to build stronger relationship
Wherever you are on this journey to transacting in foreign currencies, the Xe Corporate Team can be your partner and help your company manage its FX risk and international business.
Get in touch with an Xe expert and we’ll help you:
Analyze dual invoicing
Make and informed decision
Upskill your team and reap the benefits!
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
Recap of the first ‘Meet the Expert’ interview series and full overview
| 04-08-2020 | by Kendra Keydeniers |
A couple of months ago, we started the ‘Meet the Expert’ interview series with experts from the treasuryXL community with different treasury expertise.
Treasury needs to deal with an increasing availability of alternative financial products, intensifying risk management requirements, regulatory and compliance constraints.
What do our experts think about this rapidly growing movements within the treasury world? What developments do they expect in the future? What opportunities do they see?
We interviewed 10 experts over the last 10 weeks and asked them about their treasury career, experiences, the future of treasury and of course how COVID19 impact treasury from their perspective.
Did you miss an interview? No worries, here is a full overview of the ‘Meet the Expert’ series:
Bertus van de Kamp
Senior Business Consultant & Cash Management Specialist
read interview
Wim Kok
International Business Consultant & Trade Finance Specialist
read interview
Aastha Tomar
FX & Derivatives | Debt Capital Markets | MBA Finance | Electrical Engineer | Sustainability
read interview
Michael Ringeling
Corporate Treasury, Corporate Control and Banking
read interview
Olivier Werlingshoff
Cash- and Treasury management
read interview
Ger van Rosmalen
Trade Finance Specialist
read interview
Francois De Witte
Owner at FDW Consult | Sr. Project Manager at Gaming1 | CFO at Safetrade Holding
read interview
Arnoud Doornbos
Interim Treasury & Finance | Consultant | FX & Interest Derivatives | Treasury Outsourcing| Risk | Fintech | TMS
Vinzenco Masile
Treasury Expert/Credit Risk Manager
read interview
Arnaud Béasse
Debt Management Specialist
read interview
A big thank you to everyone that worked with me on this series, to everyone that selflessly shared their knowledge and experience with all of us! You guys rock.
If you’ve enjoyed our series so far, don’t worry, this is just the beginning! We are looking into more perspectives to share with you later this year when we will start the second ‘Meet the Expert’ interview series.
Take care and thanks for reading,
Community & Partner Manager at treasuryXL