Forex Exposure Visibility – Another Key 2016 Treasury Challenge

Forex Exposure Visibility

March 17, 2016
Colin Evans
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currency market

For the second week running, I find another really important treasury risk management topic being well written about in a Treasury Today article which states that:

“Nearly 60% of treasurers in Deloitte’s recent Global FX Survey cite a lack of visibility over currency exposures as being a key challenge in 2016.”

It’s no surprise that as soon as currency markets see increased volatility, corporate boards suddenly start scrutinizing the FX exposures of their business, demanding increased forex exposure visibility reporting of those exposures and strategies to deal with them to be proposed by the Treasury function; TT and Deloitte have timed their article very well as major currency rates have significantly increased in volatility during 2016, after quite a period of stability which allowed FX to be of secondary importance.

TT say that “a key finding of Deloitte’s 2016 Global Foreign Exchange Survey showed that 58% of the 133 corporates surveyed lacked visibility over forex exposure visibility and the reliability of their forecasts. The complexity of the topic and the lack of consistency and standardisation, in respect to the sources that treasury uses to retrieve FX data were cited as being the primary reasons for this. “

However, none of the information or problems described in the Deloitte survey is new, in fact many have existed for years and the solutions remain the same, and also still remain equally difficult to achieve.

  • Sources and format of Corporate FX Data – the forex exposure visibility problem shares many similarities with the parallel objective of obtaining simple and accurate cash flow forecast data; treasury is often faced with multiple ERP’s, data held in multiple databases (AP, AR, Balance Sheet), the need for background information held outside treasury and the use of speculative forward looking information (e.g. sales forecasts). The FX problem then becomes a 3D challenges as having consolidated all this data it then has to be broken down into individual currency positions.
  • ERP Limitations – The most powerful reporting tool for managing FX exposures is the ability to balance sheet exposure by currency giving the Treasurer the ability to see each trading currency in terms of its own specific asset / liability profile, helping pinpoint the underlying exposures, enabling a currency exposure management strategy to be formed. My experience of many US global corporates is that ERP reporting is configured to display only the USD HQ currency and foreign entity functional currency; this makes any move towards creating a ‘3D’ picture of balance sheet exposures by currency a costly and complex project.   If, (as often is the case) more than one ERP is in use this problem is magnified.
  • Role of the TMS – Deloitte correctly state that whilst 56% of Treasurers use a Treasury Management System, it plays a very small role in forecasting, measuring and managing exposures due to the issue of the critical currency specific data not being available and is mainly used for booking, reporting, managing trades.

Faced with these challenges, the usual workaround for balance sheet exposures, (similar to that of cash flow forecasting) is to take a more manual 80/20 approach, by the following;

  1. Identifying the largest individual key exposures in each currency on the balance sheet
  2. Looking for large offsetting assets or liabilities in the same currency and
  3. Hedging the Net Exposure accordingly, taking into account when the underlying exposure might change; periodically reviewing the hedged amounts.

This process can be onerous, but in most cases will smooth the company volatility, enabling the Treasurer to demonstrate a pro-active approach whilst lobbying for the funds to develop more accurate reporting tools, using the exposures identified in this process as a platform to demonstrate what could be achieved by investment in upgraded ERP forex exposure visibility reporting;

As ever, these views are my own and it’s always great to hear the thoughts of other treasury and industry professionals.