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Managing Treasury Risk – Foreign Exchange Risk (Part III)
| 7-2-2017 | Lionel Pavey |
There are lots of discussions concerning risk, but let us start by trying to define what we mean by risk. In my third article I will focus on foreign exchange risk. This risk has to be taken into consideration when a financial commitment is denominated in a currency other than the base currency of a company.
There are 4 types of foreign exchange risk.
Transaction Risk
Transaction risk occurs when future cash flows are denominated in other currencies. This refers to both payables and receivables. Adverse changes in foreign exchange prices can lead to a fall in profit, or even a loss.
Translation Risk
Translation risk occurs when accounting translation for asset and liabilities in financial statements are reported. When consolidating from an operating currency into a reporting currency (overseas offices etc.) the value of assets, liabilities and profits are translated back to the reporting currency. Translation risk does not affect a company’s cash flows, but adverse changes can affect a company’s earnings and value.
Economic Risk
Economic risk occurs when changes in foreign exchange rates can leave a company at a disadvantage in comparison to competitors. This can affect competitive advantage and market share. Future cash flows from investments are also exposed to economic risk.
Contingent Risk
Contingent risk occurs when potential future work is expressed in a foreign currency. An example would be taking part in a tender for work in another country where the pricing is also in a foreign currency. If a company won a large foreign tender, which results in an immediate down payment being received, the value of that money would be subject to transaction risk. There is a timeframe between submitting a tender and knowing if the tender has been won, where a company has contingent exposure.
Identifying Foreign Exchange Risk
Initially we need to ascertain what we think future FX rates will be. Methods that can be used include the Forward Rate Parity, the International Fisher Effect which also includes expected inflation, forecasts provider by banks and international forums, along with VaR. Model analysis can be provided, among others, via fundamental factors, technical analysis, and political analysis.
Different FX rates can then be used to simulate the effects on cash transactions when converted back into the base currency. This will provide different results that will allow a company to determine what level of risk it is prepared to accept. Finally a decision must be taken as to whether the company wishes to hedge its exposure or not. Before the advent of the Euro, both the Netherlands and Germany were members of the Exchange Rate Mechanism (ERM). This meant there was agreed band within which the spot rate could move around an agreed central point – this was NLG 112.673 equal to DEM 100.00 with a bandwidth of +- 2.25%. For some companies, this tight band meant that they took the decision not to hedge any exposure between DEM and NLG.
Financial products that are commonly used to manage foreign exchange risk include Forward Exchange contracts, Futures, Caps, Floors, Collars, Options, Currency Swaps and Money Market hedging.
Lionel Pavey
Cash Management and Treasury Specialist
More articles of this series:
Managing treasury risk: Risk management
Managing treasury risk: Interest rate risk
Flex Treasurer op treasuryXL: nog meer nieuwe diensten
| 6-2-2017 | treasuryXL |
treasuryXL en Treasurer Search hebben de handen ineengeslagen om laagdrempelige en hoogwaardige expertise van ZZP’ers uit de treasury wereld te koppelen aan middelgrote en kleine ondernemingen die geen treasurer of cash manager in dienst hebben. Intussen kunnen wij jullie laten weten dat zich al een aantal experts hebben aangesloten bij dit nieuwe concept en er zijn een aantal nieuwe diensten bij gekomen. Graag presenteren wij de nieuwe diensten.
CASH & LIQUIDITY MANAGEMENT ONDERSTEUNING
Heb je een goed overzicht van je liquiditeitspositie? Is er geen versnipperde cash- en kredietbenutting? Ben je onlangs geconfronteerd met liquiditeitsproblemen t.g.v. onverwachte uitgaven? Word je regelmatig geconfronteerd met manuele verwerking van betalingen? Ben je recent geconfronteerd met fraudegevallen? Is het aantrekken van de financiering een issue?
Een treasury expert kan je helpen in het vinden van de juiste antwoorden op deze vragen. Een Flex Treasurer kan ondersteuning bieden op tijdelijke basis, onder meer voor de volgende aspecten:
FX EN IR RISICO ANALYSE
Heb je een goed zicht op de risico’s die je bedrijf oploopt (o.m. valuta en renterisico) en op de impact hiervan op jouw bedrijf? Heb je een politiek in verband met de risicoafdekking? Heb je een zicht op de mogelijkheden om ze in te dekken? Koerswijzigingen in valuta en rente kunnen zeer vluchtig zijn en leiden tot onnodige extra kosten. Als je je wilt concentreren op je ‘core business’, zonder je zorgen te hoeven maken over bv. de EUR/USD wisselkoers of de Europese rente dan is het inhuren van een Flex Treasurer de ideale uitkomst. Hij kan de organisatie helpen eenvoudig en effectief de risico’s af te dekken, alsmede te onderhandelen over betere spreidingen en lagere kosten bij uw bank.
OPTIMALISATIE WERKKAPITAALBEHEER
Kamp je met een DSO (gemiddelde betalingstermijn klanten) die veel hoger is dan het sectorgemiddelde? Heb je een duidelijk afgelijnd acceptatieproces en een politiek voor de betaaltermijnen? Is je facturatieproces optimaal? Heb je een afgelijnde politiek voor de selectie en de betalingstermijnen aan je leveranciers? Heb je regelmatig incassoproblemen? Kamp je met wanbetalingen en afschrijvingen op je klantenportefeuille? Ondervind je regelmatig reconciliatieproblemen bij binnenkomende en uitgaande betalingen?
Een treasury & working capital management expert kan je helpen in het vinden van de juiste antwoorden op deze vragen en het optimaliseren van je werkkapitaalbeheer. Een Flex Treasurer kan ondersteuning bieden, onder meer voor de volgende aspecten:
In ons actieve netwerk zijn meerdere senior professionals te vinden die ondersteuning kunnen bieden bij deze drie nieuwe diensten en hier meer dan voldoende ervaring in hebben. Daarnaast kunnen zij ook ingezet worden als treasury coach, voor een treasury quickscan, of als iemand ondersteuning nodig heeft bij financiële instrumenten en derivaten. Overigens komen onze Flex Treasurers ook gedeeltelijk uit België, waardoor zij ook daar beschikbaar zijn.
Voor meer details over onze Flex Treasurers verwijzen wij jullie ook naar onze pagina ‘Flex Treasurer‘
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Alle Flex Treasurer zijn op korte termijn beschikbaar en kunnen ingehuurd worden voor specifieke projecten of op regelmatige basis. Neem voor meer informatie en mogelijkheden contact op met
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3 easy ways to protect your organization from cybercrime in payments
| 3-2-2017 | Christian van Ledden | sponsored content |
Leoni is not the first company falling victim to the scam. According to a recent FBI report, CEO fraud has been reported by 17,642 victims amounting up to losses as high as €2 billion (around $2.3billion) in the United States alone. The FBI further reports about an astounding 270% increase in identified victims and exposed losses since January 2015.
CEO-fraud can jeopardize the existence of an organization altogether, as the example of the Austrian lightweight components manufacturer FACC shows. After experiencing losses amounting up to €50million, they were forced to increase their equity in order to continue running.
Rising number of cyberattacks in Europe
According to PricewaterhouseCoopers, the number of cyberattacks in 2015 on finance divisions has increased by a staggering 38%. Root cause for this upsurge lies in the heterogeneous treasury system-landscape, oftentimes including a variety of different ERP systems, eBanking- and accounting tools as well as manual solutions, for instance spreadsheets. Amongst each other, they may communicate via EBICS, HostToHost, SWIFT, ACH or other, even more risky data interfaces. As all these systems operate in silos, the lack of an overarching security process is easily taken advantage of by many criminals.
An additional challenge for finance departments lies in decentralized organizational structures and lacking transparency on bank accounts, daily cash flows and blurred ownerships of workflows and approval processes. The introduction of the four- or six-eye principle will significantly lower the risk of becoming victim to the CEO-fraud as release ownership of financial transactions can be controlled and monitored.
The European Union tightens legislations to protect personal rights
A new legislations released by the European Union will include stricter punishment on organizations for violations on personal rights. The proposed changes include punishments amounting up to €20million, or 4% of global revenue in case of theft of personal data, often found on e.g. bank statements. This change will require organizations to establish more secure mechanisms to protect personal and other sensitive information of their employees.
TIS – Your audit-proof payment transaction platform
3 core topics are crucial for shielding your enterprise from any of these risks: transparency/visibility, workflows and straight-through processing.
Transparency/visibility:
Create global transparency on your banking landscape, including the incoming and outgoing payments as well as the signatory rights of all employees worldwide. Establishing a central overview will enable you to guard your organization against any attacks.
Workflows:
Restructure your workflows and approval processes and include a four-, six-, or eight-eye principle. As no single employee can process a transaction, you actively safeguard your enterprise from cybercrime.
Straight-through processing:
Encryption of your financial data, e.g. from your accounting/ERP-system to your banks and back into your ERP or TMS will minimize your cyber-attack risks and make it harder for criminals.
Together all these methods will help to secure your enterprise from fraudulent behavior and fight the new challenges. These functionalities are a small exert of what the TIS payment platform can offer you.
How do you tackle the challenges of cybercrime and minimize fraudulent behavior? Curious for your thoughts & happy to read them in the comments! Please also visit our website for additional information.
Christian van Ledden
Sales Executive at Treasury Intelligence Solutions GmbH (TIS)