Best Practices

October 2006 - Posts

• Welcome to the Professor FiREapps Blog

  Over the past 30 years corporations have been surprised again and again by unexpected occurrences in the currency markets. Professor FiREapps believes it is time to examine the issues and processes that evolved in the 1970s with the Smithsonian agreement and got stuck in the 1980s with the spreadsheet technology.  The professor has yet to see a public company that has revenues in excess of USD 100 million and that directly or indirectly does not get affected by currency.  As such, there are many ever changing challenges that almost always become surprises.  The blog is there to flush out many of the issues and create a platform to discuss them.  Professor FiREapps has spent more than 20 years working with Corporations and Governments addressing all types of risks.  As such he will raise strategic as well as very recent issues that he has come across.  It is his hobby to look for any related topics for foreign exchange corporate risk management and address them. Categories will include: National events:  i.e. China un-pegging Process improvements in managing currency risk: i.e. technology Strategic issues: i.e. to hedge or not to hedge.  Is that really the question? Tactical issues: i.e. the people doing the day to day work are often concerned about the results more than management, especially when the results are positive. Posted Oct 17 2006, 07:16 PM by admin with no comments

• Dollar Toppish

  “Front page article - Financial Times” US investors have shifted a record proportion of investments to international equities.  We know what they are trying to say as it relates to asset managers, but what does that mean for corporations? Investors are looking for additional return and believe that the USD will continue to weaken and thus the foreign equities value for US investors will increase.  Over the past 20 years whenever the front page of a paper such as FT or WSJ call for higher or lower currency, the trend is over!  So if corporations are holding off protecting non US Dollar revenue, start protecting it. The speculative upside is over. The dollar is toppish. If management is questioning why you are protecting procurement cost currency exposure, be reminded that corporations - with the exception of banks or investment banks - are not in the business of speculating in currencies. As such the cost of protecting against currency swings should be seen as part of doing business abroad, and as such as part of COGS. Posted Oct 16 2006, 05:52 PM by Sunny with 1 comment(s)

• Mastering Transaction Risk in Mergers and Acquisitions:

  Companies that do not priorities managing risk at the beginning of a Merger and/or acquisition will be surprised.  Five years ago nobody was looking at the risk/liability of pension funds affecting the value of companies. Inevitably that became an unnecessary surprise.  How about those backdated options?  Surprised?!?!?  The next avoidable surprise: foreign exchange.  The merger of two companies has netting or grossing effects with respect to currency.  This can today be avoided but has not been the focus nor received the attention by corporations or even their advisors.  Recently we had a client who came to us very early on in the acquisition process.  The foreign exchange exposure was defined and it turned out that there were natural hedges that would reduce the cost of the acquisition.  Additionally, the exposures flushed out international cash that could be used to pay for part of the deal as it was cheaper than raising additional debt.  On the other side of the perspective a different company had a net investment and when spinning it off it created a loss from foreign exchange that was completely unexpected. The key task of integration is to expose and analyze predictable risks, address them and execute decisions related to them. Easier said then done?  Not worth doing before a deal closes?  Let's take the example of RWE of Germany buying American Water Works for billions of Dollars.  Should they hedge the US Dollar acquisition given that they have Euros to spend?  What do you think? Posted Oct 16 2006, 05:50 PM by Sunny with 1 comment(s)