Best Practices

December 2006 - Posts

• It is not what you know; it is what you need to know!

  So you know your currency exposure.  Do you? You know your transaction exposure? Do you know your translation or economic exposures?  Do you need to know them? In most cases the currency exposure is just the number that a spreadsheet calculated with the information provided.  Analyzing the data within spreadsheets has been an impossible task.  While seemingly impossible, one needs to know and understand the input data not only for informational value or better decisions, but also for regulatory purposes. For example, not having visibility to whether all monetary assets and liabilities are properly identified for re-measurement can cause significant problems.  Not only the treasury departments, but also controllers and the C level of organizations are affected.  Analysts are increasingly asking the tough questions regarding currency exposures.  The hard truth is that if the C level does not have the right answers, the share price will reflect that. Professor Fireapps is working on a White Paper that will dig deep into the area of what corporations need to know.  As the Professor is drafting the paper based on its 20 plus years of experience, he would appreciate any specific questions and feedback that can be included in the study. Posted Dec 26 2006, 12:32 PM by Sunny with no comments

• Volatility on the Rise

  The storm is here and the calm is nowhere in sight. Corporations should not be concerned about where is the Euro heading or where is the Yen or BRL going.  While important, the overriding and more appropriate concern is volatility.  In one of the best practices papers recently written by the Wolfgang Koester, he points out that timing is one of the three focal areas for effectively managing foreign exchange exposures.  I believe volatility in part is what commands timing. Why?  Most companies re-measure their currency exposures after the end of the month.  With no volatility during the month, this suffices.  With volatility this action highlights an ineffective process. Let's examine a common example that happens in corporations on a fairly frequent basis. In this example, on December 3rd the FX manager calculated the corporate exposure and hedged the foreign exchange exposures the company had as of November 30th.  Next, as is common, a regional manager in London sells Euros and buys USD on December 8th.   If the company is like many companies in that they re-measure monthly, the hedges will not get adjusted until January 3rd (the next time FX exposure gets re-measured).  During times of relatively low volatility such as we experienced over the summer of 2006, the market risk is probably manageable. However, in the recent month the Euro appreciated and this action would create significant negative volatility and surprises for management including the CEO and CFO.  They will have assumed that the company was hedged and may even be disappointed that they did not participate on the upside of the Euro.  The bad surprise will be that essentially they will have been over hedged and actually short in Euros - created by the net of early selling the Euro and not adjusting the hedge until next month.  The irony is that the FX manager has been asking the treasury for more help and better tools. Management has been asking: Why?  You are doing a great job.  Sound familiar?  How about FX managers and treasurers warning of China unpegging.  That will cause volatility making the recent decrease in the value of the USD look like childs play. Volatility often brings systemic as well as process issues to the surface.  Earnings reports on Q4 2006 will show surprises that analysts love to punish. As pointed out by Brent Callinicos, CFO of Microsoft Platform, in CFO magazine, "Shareholders and analysts don't give you a pass for saying, "We would have made our earnings but for foreign exchange." Many studies indicate that shareholders punish that. Posted Dec 08 2006, 11:26 AM by Sunny with no comments