Corporate FX Questions and Answers for 2016
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Transcript of Corporate FX Questions and Answers for 2016
Agenda• Introductions
• Corporate FX market trends
• Best practices corporate currency exposure management case
studies
– Dow Corning: End to End Automation Drives more Strategic Risk
Management
– Avnet: Managing FX Risk in Complex, M&A Driven Global Business
Operations
– FLIR Systems: Minimizing EPS Impacts through Holistic, Cost
Effective Currency Risk Management
• Q & A
• Resources
IntroductionsBruce Lynn, CTPThe FECGManaging Partner
Bruce has over 20 years of corporate and banking experience in all aspects of treasury and financial management by successfully tackling major assignments in such areas as treasury operations, cash management, strategic planning, credit, systems enhancements as well as operating and capital budgets. Bruce has an Industrial Engineering degree from Lehigh University, a MBA in Finance from the Stern School of Business and is a Certified Treasury Professional (CTP) by the Association for Financial Professionals (AFP).
Bruce Lynn
The FECG
Managing Partner
IntroductionsAndy GageFiREappsVP Strategic Market Development,Global Head of Research
Andy advises corporations, consulting firms and business partners on a wide range of foreign exchange exposure management topics and emerging industry best practices. Prior to his tenure at FiREapps, Andy has held management positions at Cyclone Commerce, Deloitte Consulting and Syntex Pharmaceuticals. Andy holds a B.S. in business administration from the University of Arizona and an MBA from the University of Texas, at Austin.
Andrew Gage
FiREapps
VP Strategic Market Development,
Global Head of Research
Euro Crisis
$0.02 $0.06 $0.09$0.94
$3.00
$20.27
$22.73
$4.19 $3.67 $4.10 $4.18
$5.83
$3.26
$1.21
$4.00
$18.66
$28.94
$19.03
$0
$8
$15
$23
$30
Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014 Q1 2015 Q3 2015
$16.95
(Bill
ion
s)
North American Negative Currency Impacts By
Quarter (Billions)
Source: FiREapps’ Quarterly Currency Impact Report: Available at fireapps.com
EUR (102)
BRL (40)CAD (37)
JPY (24) AUD (23)
€
¥$R$ A$
Source: FiREapps’ Quarterly Currency Impact Report: Available at fireapps.com
Top 5 Currencies Causing Negative
Impact in Q3 2015
31%
40% 39%
24% 23%
33%
14%19%
26% 26% 25%
47%
41%
23%
46%
63% 64%
50%
0%
20%
40%
60%
80%
2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1
Euro Crisis
Source: FiREapps’ Quarterly Currency Impact Report: Available at fireapps.com
North American Corporates Fielding Analyst
Questions After Reporting (-) ImpactThe last 3 quarters represent the 3 highest since we began research
Q2 2015 QUANTIFIED & REPORTED IMPACTS
213
233
205196
186
132
202215
279
170
0
60
120
180
240
300
Q1 2013 Q3 2013 Q1 2014 Q3 2014 Q1 2015
97 95
7871
54
29
109
128
177
96
116138
127125
132
103
93
87
102
74
0
60
120
180
240
300
Q1 2013 Q3 2013 Q1 2014 Q3 2014 Q1 2015
# Quantifying Size of Impact # Not quantifying, but reporting (-) Impact
Q2 Per Company Impact was Highest Ever The average negative impact was $177 million – by far the highest since we began tracking that data
point in 2012 Q4; and nearly 4X higher than Q2 2014
$38 $43
$54
$82
$60
$42 $37
$146
$164
$177
$-
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015
What Makes FX Exposure Management So Hard?
UnnecessaryTransactions
DataIntegrity
ERPLandscape
ComplexSpreadsheets
CurrencyVolatility
ComplexDerivatives
TaxImplications
CashManagement
IntercompanyPayments
PolicyCompliance
GlobalCoordination
InaccurateExposures
UnnecessaryTransactions
PoorResource
Utilization
EarningsVolatility
IncreasedAudits
MarketRisk
NonCompliance
UnnecessaryCosts
BusinessImpact
Challenges
ForeignExchangeManager
CS
Manufacturing
Case Study
With manual processes inside a complex SAP environment, we knew there were things that we didn’t
know, and that made us uncomfortable. That discomfort drove our decision to transform the
program.”
› Highly manual processes were time consuming, error prone, and heavily reliant
on human capital
› Individual currency VaR approach to hedging led to a number of trades and extra
cost with no opportunity to leverage cross-correlations
› 50% of its revenue is outside of the U.S.
› B/S Hedging $15 billion across 2,000 trades per year
› Lack of visibility caused Treasury to over- or under- hedge
› Complex SAP-based multicurrency accounting environment was decentralized
CHALLENGE
Annual Revenue:
$6.22 B (FY2014)
Headquarters:
Midland, MI
Business:
Dow Corning is a
multinational
corporation, equally
owned joint venture of
Dow Chemical and
Corning
SOLUTION: FiREapps Enterprise
Srikanth Dasari, Head of Treasury Front Office, Dow Corning Corporation
› Comprehensive overhaul of each step in the currency risk management process
› Automated straight-through processing gathers exposures from SAP through
FiREapps to IT2 and then ultimately 360T
› Dow Corning leveraged exposure definition as well as data integrity analytics for
a more comprehensive view of the data they needed
CSCase Study › Generated gross savings of $5 million per year from quantifiable
improvements
› Automated straight-through processing eliminated 600 hours of human
capital and yielded $750k in reduced market risk
› Value at Risk approach (VaR) delivers $2.75 million in savings by
enabling Treasury to hedge less and protect more
RESULTS
Executed Trade Data
G/L Data
Enhanced Capabilities:
› Comprehensive, on-
demand visibility tailored
specifically to the
Treasury reporting
process
› Portfolio risk approach,
with analytics that allows
Treasury to understand
currency risk taking into
account correlations
across its currency
portfolio
› Error free information
› Currency Action
Recommendations
› Reduced no. of trades
SOLUTION ARCHITECTURE
Manufacturing
External
Counterparties
Balance Sheet Actuals
Validated fullexposure set
TradeConfirmations
CS
Distribution
Case Study
We give finance [across the world] access to hedge recommendations and the underlying data in FiREapps.
They either check a box to tell us that they are okay with the data, or, if they spot an incorrect accounting
entry from their general ledge, they let us know so that we can make the necessary adjustments to hedge our
recommendations.”
› 300+ global locations and customers in 80+ countries with 10 different instances of
SAP and other ERP systems
› Since 1991, the company has completed 80+ acquisitions around the world
increasing exposure to volatility in foreign currencies as the percentage of income
generated outside of the U.S. increased to 60%
› Treasury couldn’t systematically identify or analyze exposures leaving risk
manifesting in the FX gain/loss line
› Different entity accounting groups had mixed FX interpretations manifesting itself in
daily excel submissions
CHALLENGE
Annual Revenue:
$27.5 B (FY2014)
Headquarters:
Phoenix, AZ
Business:
Avnet, Inc. is a
technology Business-to-
business B2B distributor
SOLUTION: FiREapps Enterprise
Joe Burke, Vice President & Treasurer, Avnet, Inc.
› Flexible and scalable cloud based platform for closed-loop FX exposure analytics
that helped with cross-functional collaboration and hedge program decision support
› Robust analytics bring balance sheet exposures into sharp focus giving Treasury
the visibility necessary to manage them
› FiREapps picks up the general ledger balances of all subsidiaries, and will
dynamically detect/include future additions to the system
› Manage exposure with closed-loop straight through processing – Finance has
access to hedge recommendations and the underlying data in FiREapps
CSCase Study
› Lowered hedging costs by $75k a month in Europe through organic
exposure elimination and reduced transaction volume
› Standardized global exposure definition across all regions and systems
› Gained real-time visibility towards exposure and VaR at the entity and
enterprise level
› Increased the frequency of exposure management based on VaR in some
cases to once a day
› Reduced FX Gain/Loss volatility on a corporate and regional basis
› Adaptable architecture that enables easy integration for new acquisitions
RESULTS
Regional
Exposure
Summary Hedge Data
TradesInternal & External
CurrencyActions
G/L Data
Enhanced Capabilities:
› Consolidated view of
Global Exposures
› Analytics platform
interoperates with the
company’s ERP, trade
execution and
accounting systems
› Treasury now has
automated exposure
identification, global
visibility and the
analytics required for
informed, effective risk
management at the
regional level
SOLUTION ARCHITECTURE
Distribution
Latin America
North America
EMEA / Asia
Template Captured
Exposure Data
Monetary Asset & Liability Balances
Case Study: FLIR Systems, Inc.
Minimizing EPS Impacts
through Holistic, Cost
Effective Currency
Risk Management
CS
Manufacturing
Case Study
FiREapps analytics and reports provide a single truth for understanding exposures at the
account and entity levels, enabling corporate treasury to work with regional controllers to
investigate the root causes of exposures, improve processes and mitigate risk across
geographies and divisions.”
› 48% of revenue generated internationally
› Labor-intensive manual process that wasn’t formalized
› Without a structured FX risk process, treasury couldn’t systematically
identify or analyze exposures leaving risk manifesting in the FX
gain/loss line
› Difficulty gathering exposure data from several operating units
› Unable to identify and utilize natural hedging opportunities
CHALLENGE
Annual Revenue:
$1.53 B (FY2014)
Headquarters:
Wilsonville, OR
Business:
FLIR Systems is the
world’s largest
commercial company
specializing in the
design and production
of thermal imaging
devices
SOLUTION: FiREapps FX Analytics Pro
Randahl Finnessy, VP, Corporate Treasury, FLIR Systems Inc.
› CoRE Analysis to benchmark hedging program from a cost / risk
perspective
› Analytics to identify and analyze exposure with a view to reduce
exposure organically with improved forecasting and cash management
› Decision Optimization
CSCase Study
› Volatility went down, predictability went up 90% confidence in exposure data
› Organically reduced B/S exposure by more than 50% in the first 6 months by using exposure
intelligence to restructure and settle outstanding intercompany transactions
› 90% visibility of worldwide exposure due to timely access to new exposure information when the
FX landscape changes:
› Mergers and acquisitions
› Integration of disparate accounting systems
› Minimized FX gain/loss, protected EPS and provided predictability in the income statement
› Analysis to potentially gain over $40K in quarterly interest income with a 70% risk reduction
› Reduced risk and cost of hedging
RESULTS
Enhanced Capabilities:
› CoRE analysis that
identified 36 currency
pairs representing $97M
in gross expenditure and
$16M VaR
› Identifying all sources of
exposure and reducing it
organically
› VaR analysis to help
finance improve
forecasting and make
informed cash
management decisions
› Robust formalized
program to manage FX
exposure, currency pair
volatility and risk
› Extract, aggregate,
harmonize and validate
data on demand from
multiple systems
Manufacturing
Questions & Answers
Bruce Lynn
The FECG
Managing Partner
[o] 203-655-4806
[m] 203-722-3382
www.thefecg.com
Andy Gage
FiREapps
VP Strategic Market Development,
Global Head of Research
[o] 480-443-7333 Ext 155
[m] 480-213-4476
https://www.fireapps.com
To Learn More About FiREapps Solutions
Download free Case Studies
Download the free Currency Impact Report
Schedule a conference call, Executive Currency Risk
Briefing, or to receive a copy of today’s slides:
Contact Rob Richards:
480-443-7333 X510