Established Multinationals

“We already have an FX program, but we’d like to improve our analytics and execution.”

When it comes to FX risk, most multinational corporations fall under two categories: those who’ve had a major problem, and those who will. This is because most of these companies—even the most sophisticated—are still using spreadsheets or third-party software and technology vendors to manage their data.

This antiquated and inadequate approach has potential problems that can fall under three broad categories:

• Process – Human accounting errors and managing data in two-dimensional spreadsheets can result in problems that can get worse over time, and that might not be visible until it’s too late.
• Analytics – Lack of timely insight into or understanding of data can greatly increase your exposure to FX risk.
• Execution – Lack of transparency into bank fees can cost you money.

There’s a better way than spreadsheets to manage your FX risk.

• Your analyst accidentally keyed an extra zero into his balance sheet forecast, and you hedged it. Can you explain what happened to the CFO?
• Are you spending too much on upgrades, too dependent on a single tech person, and have too many moving parts across too many people and platforms?

The ability to organize, manipulate and analyze data is critical in understanding a company’s risk exposures. Unfortunately, many established companies today have a risk management infrastructure dependent on spreadsheets—an antiquated system that’s inherently laden with risk. Spreadsheets are prone to human error, costly updates, lack of synergy and integration, and inefficiencies that can all lead to significant loss of revenue.

Additionally, currency risk in a multinational corporation has four dimensions that need to be considered at once, and on an ongoing basis: Time, Currency, Entity and FX risk line items. Spreadsheets only allow you to address two of these dimensions at once. If your company has only one entity or one currency to consider, a spreadsheet might be sufficient, but higher levels of complexity call for a better solution.

Using spreadsheets also makes your company highly dependent on the person or team responsible for managing this information. Even in sophisticated companies with vast resources, most full-time personnel are only dedicated to proper FX risk management a few months out of the year, part-time, as opposed to focusing on it full-time all year. FX risk is critical enough to have a dedicated team of experts doing the best job possible.

It’s for all of these reasons and more that make using spreadsheets to manage and mitigate FX risk less than ideal for understanding or capturing the very risk you’re trying to hedge.

Do you have timely, adequate insight into your potential exposure to risk?

• It’s the end of the quarter, and your numbers need to be final in two days. Can you explain your FX risk management results before the books close?
• Do you need to book a consolidating adjustment, or do you just hope for the best and possibly have to restate your results?
• Can your reporting system provide information in a timely manner, and in an appropriate format?
• Have you done everything you can to avoid another Lehman Brothers?

Even for more established, sophisticated companies, getting accurate and timely FX data is a challenge that can affect its bottom line. Accounting errors, software issues and inadequate process—all of these factors and more can all result in poor visibility into data and understanding of exposures, which can affect a company’s bottom line.

Depending on the level or types of currency exposure, a large or sometimes even small negative currency swing can result in significant losses. Many companies don’t fully understand their own currency risks, and some don’t even know they existed until it’s too late.

Not knowing what you’re paying in fees can cost you much more than you think.

Since 1996, U.S. banks alone have averaged $1.5B per quarter in trading revenue related to foreign exchange (FX) trading. With FX derivative contracts representing about 7% of outstanding trades on the market, FX is the single biggest source of revenue among trading instruments—roughly equal to interest rates, credit, commodities, and equities combined. With the way things are currently structured, the top five U.S. banks have over 95% of the market share in derivative trading—and only they know what you are paying.

Banks use spreads, commissions and premiums to make money on foreign currency trading and hedging. Companies should know what they’re getting for the excess spreads they’re paying, and what they’re essentially giving away. The fact is that when it comes to FX, you’re probably paying a lot more than you think you are (See related New York Times article here).

It should also come as no surprise that the International Swap Dealer Agreements (ISDA) signed with banks tend to be one-sided. If the bank defaults on a corporate customer (think Lehman Brothers), there’s no opportunity to collect on collateral. All of this may work well for the banks, but not so well for you.

Consulting

We can help your company collect, identify and quantify its currency exposures to the appropriate risk management policy (and solutions). We can then recommend a customized, appropriate FX risk management program that meets your individual needs, or improve on your current hedging strategy.

Analytics

A turnkey, patent-pending FX risk management software solution used by the most sophisticated large multinationals. We can customize and implement Atlas FX-A as part of Atlas FX-CTE services (Consulting, Analytics and Execution), or integrate with your existing ERP and TMs systems to give you up-to-date information on your currency exposure and hedging effectiveness.

Execution

Reduces the need to engage with FX banks and works in your best interests to yield a significant improvement in pricing and counter party risk mitigation over your current currency trade practices.

If you’re an established multinational company seeking an external FX risk management firm with deep expertise, the latest software solutions and a proven execution component—to be outsourced collectively or used individually—please contact us for a free consultation today.