From Data to Decision: Effective Strategies for Managing ...
Transcript of From Data to Decision: Effective Strategies for Managing ...
From Data to Decision:Effective Strategies for Managing FX
Exposure as an Enterprise RiskWolfgang Koester
CEOFiREapps
Cynthia TorsneyForeign Exchange Manager
Agenda
• Introductions & Overview• Foreign Exchange Exposure Management Overview
– FX G/L Drivers– Accounting Challenges– Treasury Challenges
• Real World Opportunities– Identifying and overcoming Gaps in existing processes– FX Issues Impact Treasury Today– Impact of Manual Processes
• Automating FX Exposure Management– Automated FX Data Management– FX Exposure Management for the Balance Sheet
– FX Exposure Management for Forecasted Cash Flows– Benefits
Currency Currency Volatility %USD JPY 22.84%
USD SEK 22.25%EUR USD 21.50%USD CAD 21.46%GBP USD 20.95%USD CHF 20.48%EUR GBP 13.97%EUR CHF 12.55%
Avg. 19.50%
Currency Currency Volatility %AUD JPY 59.10%USD KRW 56.00%USD MXN 52.10%USD BRL 49.25%USD AUD 47.06%USD NZD 41.88%USD CZK 26.75%USD NOK 21.50%USD DKK. 21.25%
Avg. 41.65%
One Week Volatility
Risk in Volatility and Time
Exposure One Week Risk (Volatility)January 2008
G10 Currencies $70MM 10% = $7MM
Non-G10 Currencies $30MM 18% = $5.4MM
Total $12.4MM
Exposure One Day Risk (Volatility)September 2008
G10 Currencies $70MM .6% = $.42MM
Non-G10 Currencies $30MM 3.2% = $.96MM
Total $1.4MM
Reduce Probability of Risk by Reducing Time
$21.0MMTotal
35% = 10.5MM$30MMNon-G10 Currencies
15% = $10.5MM$70MMG10 Currencies
September 2008
Foreign Exchange Exposure Management Value Chain
Controller Treasurer
Banks / Inv. BanksExposure ManagementCorporate Transaction Data
Copyright 2007 Rim Tec Inc. Slide 12
Trade Post-TradePre -Trade
Select Price Execute Confirm Settle AccountAggregate Analyze Decide
Business Systems
Account ReportTransact
Compliance
Foreign Currency Exposure Lifecycle TM
Forecasted Exposure Transaction Exposure
Forecasting / Budgeting
Sale anticipated, forecasted, budgeted or planned
Purchase/Expense anticipated, forecasted, budgeted or planned
Transaction
Sale occurs in foreign currency
Collection
Cash received
Conversion
Sell foreign currency and buy USD
Purchase occurs in foreign currency
Foreign Currency Activity
Nature of Exposure
Systems
Objectives
Long Term Exposure > 3 Months Balance Sheet / Transaction Exposure
ERP / Accounting Systems / Spreadsheets
Managing FX Gain / Loss on Income StatementGross Margin / Net Operating Income
Protection
Planning / Budgeting / Procurement / Order Mgmt. / Spreadsheets
Buy foreign currency to make payment
Controller Treasurer
Business Units
Corporate Controllers
FX Management Process: State of the Art?
Complex Exposure Reporting Spreadsheets
Banks and Trading Platforms
Enterprise Cash Flow Exposures
Sell and buy side balance / coordination
OutboundLogistics
Supply ChainMgmt
Invest-ments
InvestReturns
R/M &Lower-tierSuppliers
ShipShip
Ship
Ship
Ship
Top-tierSuppliers
PP&E
FinancialAssets
A/PWIP
A/RInv
CompanyOr Product
Division
Taxes DebtCompetitor Vulnerability /Advantage Assessment
Customers
Distribution Channel
Returns
Repair & Service
Company Outsourced Activity Demand / Info
Foreign Service Center Providers
Potential Non-Dollar Exposure
PrimaryValueChain
SupportServiceValue Chain
Currency Flow & ExposureAssessment Model
Customer Vulnerability or
Opportunity
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2120
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FX G/L on Exposure Data (Accounting Systems) (Controller)
FX G/L on Derivatives (spot) (Treasurer)
Exposure Management Efficiency (Should net to Zero)
Derivative Cost/Benefits (Fwd Points)
FX Gain / Loss on P/L (CFO Focus)
Identifying Balance Sheet Exposures
FX Gain / Loss on the Income Statement is the result of netting the gain/loss on accounting exposures and the gain/loss on hedges that the Treasurer executes. In theory, the gain/loss on exposures and the gain/loss on derivatives should net to zero. In reality, this is rarely the case, and the Treasurer has very little control over the corporate FX Gain/Loss that he/she is responsible for reporting to the CFO
FX G/L on Exposure Data (1) (Controller)
FX G/L on Derivatives (spot) (Treasurer)
Exposure Management Efficiency
Derivative Cost/Benefits (Fwd Points)
FX Gain / Loss on P/L (CFO)
(1)Includes accounting volatility
Bad Data: The beginning of a hard problem
Common data issues that result in in accurate exposure data
-Incorrect Account Setup in G/L systems
-Improper Systematic Revaluation Processes
-Incorrect Transaction Postings- Intercompany Transactions- Improper MC Transaction Posting - Lack of proper accounting controls and
monitoring processes
When data delivered by accounting is inaccurate or incomplete, the company will experience unpredictable results.
FX G/L on Exposure Data (1) (Controller)
FX G/L on Derivatives (spot) (Treasurer)
Exposure Management Efficiency
Derivative Cost/Benefits (Fwd Points)
FX Gain / Loss on P/L (CFO)
(1)Includes accounting volatility
Inaccurate Definitions and inefficient Decisions
Common Treasury Operations issues and challenges
-Lack of data, access, visibility & transparency
-Manual exposure definition process- Manual, decentralized- Spreadsheet intensive- 80% focus on data aggregation
-Inefficient decision making process- Time latency, creates market risk- Poor collaboration with stakeholders
( tax, controller and local treasurers )
When Treasury relies on manual processes, complex spreadsheets and timing delays, companies are at increased risk of inaccurate exposure definitions and currency volatility
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Multicurrency Transaction Accounting
Multicurrency Transaction Accounting
• Identify FX exposures
• Analyze exposure data for accuracy and completeness
• Expedites resolution of discrepancies
• Provide recommendations for reducing and managing exposures
• Export currency actions
• Reporting
• Import Trade Instructions
• Select and Price Derivative Products
• Execute Trade
• Import Exposure and Hedges
• Track & Account for Trades
• Hedge Accounting and Effectiveness Testing
• Capture transaction exposures within General Ledger Accounts
• Apply FX re-measurement and revaluation rules
• Provide source data input for FX exposure management
Exposure Analysis & Decision Making
Exposure Analysis & Decision Making Trade ExecutionTrade Execution Hedge AccountingHedge Accounting
FX Automation: Toward a Straight Through Process
• In the past, Google had multiple sets of books & limited visibility into its FX exposures
• FX Team relied on manual processes and incomplete data for defining, analyzing and managing foreign currency exposures:
– No single source of complete exposure “truth”
• Input from many teams required to determine a single exposure
• Direct Oracle queries were inconsistent, dependant on individual querying
– Spreadsheet-based definition and analysis
• Manual data entry: Error prone & time consuming
• Process latency introduced market risk
– Lack of exposure reporting and transparency
• Difficult to understand root causes of exposures
• No basis for cross-functional problem solving and process improvement
• Unable to take full advantage of existing natural hedges in the business as a means of reducing exposures and lowering hedge transactions costs
• Focus of hedging was limited to large, easily visible exposures
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In the Trenches: Balance Sheet/Transaction Exposure Issues
Pain Points: Impact of Manual Processes
FX ExposureReport Delays Close Process
Fixed Assets Impacton FX Hedges
• We required instant access to expense data by currency by set of books• A report was run by business systems analyst• Report was key component in determining FX exposures
• Auditing for accounting errors that affect exposures was a time consuming process•Errors could reduce hedge effectiveness• Strong focus on account reconciliations
•IT equipment being shipped among many different entities•Intercompany receivable and payables affected by asset movements•Difficult for Treasury to quickly adapt hedges to exposure changes
• Consequence: It took 1-5 days for report to be run. We needed data to be easily accessible without time delays
• Reporting time delays prohibited FX team from taking timely actions to hedge our risks
• Consequence: resources targeted at auditing rather than analysis
• Without tools to easily aggregate data and identify exposure, audit activities by finance team were inefficient
• Consequence: Risk of lower hedge effectiveness
• No existing internal system could inform you that an exposure had changed