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.
An Introduction to Forwards, Futures and Options | Part 1
03-06-2020 | by Aastha Tomar
Our financial world has now gone through enough crisis. Some learnt from previous crisis and were braced for the next while some were still in their learning phase. The current crisis took everyone by alteration because this time it was not the financial sector which was responsible for the ordain. The fluctuations seen in equity, bond, commodity and currency markets may have become Achilles heels for Corporate Treasurers in current times.
The incumbent state of affairs was such that Corporates had to protect their bottom line while trying to stay afloat. The entire cash flow projections would have gone for a flip for those who didn’t hedge their foreign currency exposure. One way that would have taken a part of vexation away from corporate treasurers due to currency fluctuation is hedging. It would have attenuated the impact of currency fluctuation on investments, borrowings, assets etc .
Let us have a look at the most used and basic methods of hedging in this article :
Forwards
So what are forwards? In a simple language its a hedge product between two parties which freezes your cash flow for a future date. That ways whatever the market situation be on the maturity date of the hedge, your cash flows are locked and predetermined. Whether you are an exporter who can know the exact value of future payments or an importer who can anticipate the exact costs of products; a forward will hedge the risk of currency fluctuation for both.
Features of Forwards :
Example :
Suppose you are an exporter based in the Netherlands and you want to sell Dollars in an years time. You know due to current euro zone, corona crisis and negative interest rate scenarios Euro may fluctuate sideways and therefore you want to lock in the price of USD today itself so that one year down the line you don’t have to worry about the fluctuating rates. What do you do ? You approach a bank informing them that you have to sell USD (buy EURUSD) for 1st June, 2021. After basic documentation bank enters with an forward agreement with you . Where in today’s spot rate , the currency premium for one year , the amount of hedge and the maturity rate will be mentioned .
Spot EURUSD : 1.08282 (1 EUR = 1.08282 USD )
1 year interest rate for EUR = -.07%
1 year interest rate for USD = 0.7%
So after one year based on interest rate parity :
EUR 1* ( 1+(-.0007))= USD 1.08282 *( 1+ .007)
0.9993 EUR = 1.090 USD
Therefore 1 EUR = 1.0911 USD
Therefore by entering a forward contract today you have fixed your EURUSD rate to 1.0911. Note that because the dollar has a higher interest rate than the EUR, it trades at a forward discount to the EUR.
Let us take a simple scenario analysis to make things clearer :
Here the forward deal amount is : EUR 1mn
Spot rate on the day of deal is : 1.08282
Forward rate fixed for the deal is : 1.0911
We can clearly see above that if the spot is same as the forward rate on the maturity date then there is no loss or gain, but if spot moves to 1.09250 then the corporate saves USD 1400 on the contrary if spot moves to 1.0900 the corporate wont be able to take advantage of the low price and will have to exercise the forward at 1.0911 as fixed earlier thus letting go of USD 1100.
So if forwards are so beneficial why do corporates still do not execute forwards for all of their foreign currency transactions :
Whatever the reasons be but the main business of corporates is not to use their energies in managing their fx risk but to increase profits by their mainline business hence its always advised for corporates to hedge their fx risk as much as possible to increase efficiency and prevent themselves from unseen shocks.
In our next post in this series we will see a second type of hedge … to be continued. Till then keep learning and be safe .
FX & Derivatives | Debt Capital Markets | MBA Finance
Electrical Engineer | Sustainability
Meet our Experts – Interview Wim Kok
02-06-2020 | Wim Kok | treasuryXL
This week you will meet Wim Kok, a Trade Finance Specialist with decades of experience.
Wim started his financial advisory company recently after a long career in the banking industry (> 40 years). During his banking career his interest and focus was always connected to the commodity & trade finance industry both in sales and product innovation. Activities in various senior roles, including relationship management, head of department, change management and start up business (internationally).
Nowadays Wim is involved as independent advisory in supply chain management and digitalisation of the logistic industry. Building bridges, simplifying (trade) finance and logistics. Closing the gap between procurement and finance (treasury).
We asked him 11 questions, let’s go!
1. How did your treasury journey start?
I started working in Treasury (assistant treasurer) during the late 70 ties i.e. my 1st job was with Continental Grain a New York based grain trading company with a strong foothold in Europe.
The Rotterdam Harbour, at that time, was the physical entry point for US grain coming to Europe.
I worked with 3 merchant banks (Slavenburg, Bank Mees & Hope & Albert de Bary) pooling and netting bank accounts (manually) to optimise currency and debit/credit interest positions for the Rotterdam company.
2. What do you like about working in Treasury?
I see the treasury operations as a pivotal function within an organisation meaning that you have to know the cash generating mechanics of the company inside out. Seamless use and coordination of cash contributes to a seamless treasury function and an added value for the company.
3, What is your Treasury Expertise?
I started my career in the late 70ties as assistant treasurer with an American global grain trading company in the Netherlands – My main task was to streamline and optimise the money flows in 8 different main currencies between 3 banks. This was the early start of the cash management development. Later on I moved into the trade and commodity structured finance direction.
4. Do you have examples of risk mitigation, creation of opportunities and/or cost savings?
Very simple netting and pooling arrangements (interest risks). Discounting receivables, Bills of Exchange, Documentary L/C’s or insurance arrangements, making use of swaps and FX derivatives (currency risks) etc. on the payable side – supplier finance structures making use of the rating of the corporates.
5. What has been your best experience in your treasury career until today?
That’s difficult to mention as my treasurer career was rather short, but I have seen the position and function grow over the years bridging the silo’s within a company (especially within the bigger corporates).
6. What has been your biggest challenge in treasury?
At my time with Continental Grain is was the perception of the people. Hugh silo’s between booking /audit and sales / marketing we started to change the perception and managed to bridge the different worlds of finance and commerce by showing that a good treasury function earned additional income.
7. What’s the most important lesson that you’ve learned as a treasurer?
My most important lesson learnt (and that seems a bit odd having worked within banks for almost 40 years) is: as a larger corporate always make sure you keep your independence in other words select more providers to support you.
8. How have you seen the role of Corporate Treasury evolve over the years?
Very much in such way that in the bigger Corporates you see nowadays a lot of inhouse banks and for mid & large corporates a treasury function is more or less the standard.
9. The coronavirus is undoubtedly an unprecedented crisis. In general, can you elaborate on the impact this virus has on treasury from your perspective?
In this respect I would like to refer to the article I recently wrote for TreasuryXL: ”How to simplify procurement and finance in the supply chain” – I think a lot of companies will have to reconsider their current (disrupted) supply chains and financial systems. Companies going into 2021 will have to adopt to the fast changing pace in any discipline or a combination be it digitalisation, IoT, Blockchain, AI, robotics or the Cloud
10. What developments do you expect in corporate treasury in the near and further future?
Definitely transparency, efficiency and speed will improve dramatically due to interconnectivity of systems and transactions, data protection (and use) and cybersecurity will become a more important factor.
11. What is your best advice for businesses without a Treasurer?
Try one because a good treasurer will always earn (at least) himself back for the company.
International Business Consultant
Trade Finance Specialist
Does your business need support in Treasury or a Treasury QuickScan?
Live Demo: Ready for fraud prevention? – TIS shows you how!
| 29-05-2020 | TIS |
“Due to unforeseen circumstances this live demo session had to be cancelled. We will inform you once registration for the next session is open”.
Live Demo: Ready for fraud prevention? – TIS shows you how!
Friday June 5, 2020 from 2.00 pm to 2.30 pm CEST | 30-minute demo |
See different fraud scenarios in the TIS fraud case study and learn how TIS can help you preventing such cases. They will present different TIS functionalities and will take your high level questions at the end of the session.
Date, time and registration
Date: 5 June, 2020
Start: 2:00-2:30 PM CEST