Currency Management with Agustin MacKinlay – A Comprehensive guide
Welcome to Corporate Treasury 101! Today, we have an exciting journey for you into the intricate world of currency management.
Our special guide for this expedition is Agustin MacKinlay, a senior financial writer at Kantox. Besides his role at Kantox, Agustin also shares his rich insights as a former lecturer and a fellow podcaster. His expertise spans currency management, foreign exchange risk management, and FX trading, making him a wellspring of wisdom in this field. Today, we bring the crux of an enlightening conversation with him, transforming it into a treasure trove of information for you.
Navigating the world of currency management can sometimes feel as complex as deciphering an ancient script. But don’t worry! With Agustin’s insights and our breakdown, we will turn this script into a story you can understand and relate to.
So, get ready to embrace currencies confidently and unlock new dimensions in your role as a treasury professional. Let’s embark on this exciting journey together!
What Does Agustin Mackinlay Do, and What Is Kantox?
Agustin MacKinlay is a Senior Financial Writer at Kantox and hosts the podcast Currencycast. His role entails creating informative and insightful content that can guide treasurers through the complex currency management process. This includes writing reports and conducting research that can benefit those in the treasury field.
Now, let’s dive into understanding Kantox a little better. Kantox is pioneering a new software category called ‘currency management automation.’ This means they provide automated tools to guide treasurers through the multifaceted currency management process. This process, as explained by Agustin, is divided into three phases:
- The Pretrade Phase involves using a foreign exchange rate to set the price of goods for sale, either in domestic or overseas markets.
- The Trade Phase – this phase is all about executing forward currency transactions.
- The Post-Trade Phase – this last phase is about handling payments and collections in foreign currencies.
The approach Kantox takes is end-to-end, focusing not just on technical aspects but on providing real solutions for business problems. Interestingly, they see currency management as a potential risk (or “danger”) and an opportunity for treasurers to become more strategic. Kantox’s optimistic vision is to enable professionals to fully leverage these opportunities, or in their words, to “embrace currencies.”
What’s The Currencycast Podcast About?
CurrencyCast is a podcast started by Kantox in 2022. Its primary goal is to spread awareness about the category of currency management automation. The podcast dubbed a ‘masterclass’ by some, focuses on breaking down complex currency management processes into digestible, easy-to-understand episodes. This resource is valuable for anyone keen on understanding the intricate world of currency management and foreign exchange. Agustin and his team at Kantox are thrilled to continue offering this informative resource in the foreseeable future.
What is Currency Management According to Kantox?
According to Agustin MacKinlay, as per Kantox’s perspective, Currency management uses foreign currencies in both commercial and financial operations. This can include selling goods in overseas markets and receiving payment in various currencies like dollars, Thai baht, or Brazilian Reais. It could also involve selling domestically, but the goods sold are imported from overseas, so foreign currencies play a role in the pricing.
Currency management encompasses much more than just risk management, which is usually the aspect that people focus on. While risk management is important, it isn’t the only aspect to consider. Currency management also involves processes such as payments and collections in foreign currencies.
Difference Between Risk Management and Currency Management at Kantox
Risk management and currency management, while related, are distinct from one another. The former is typically understood as executing hedges, while the latter goes beyond this. Currency management includes pricing with a foreign exchange rate, a key component. At Kantox, the viewpoint is broader – they believe there are ways to manage the inherent risk in currencies without executing hedges. This requires a slightly different approach and opens up many opportunities for treasurers. It allows them to be strategic players within the company, utilizing currencies to enhance its competitive position, secure budgeted profit margins, and possibly increase its value.
Examples of Currency Management in Corporates
Let’s take an example of a US-based company that has an order to sell goods worth a hundred thousand euros. The payment for this transaction is expected in three months. The exchange rate will fluctuate during this interval, and this change needs to be managed – this is where currency management comes in.
Different companies will have different needs based on their pricing characteristics. Some may have dynamic prices that change over time. Others might want to keep their prices stable for an entire campaign or budget period. Some companies might prefer keeping their prices steady for as long as possible. All these scenarios would require different types of currency management. So, currency management plays a crucial role in navigating different companies’ varying needs and situations.
Purpose of Currency Management and Instruments Used in Currency and Risk Management
Agustin MacKinlay highlights how it plays a pivotal role in enabling global trade. He says you don’t need to exchange your currency when dealing with different territories or countries. It’s equally crucial to hedge against potential currency risks.
He explains that currency management doesn’t stop at commercial transactions. It extends to financial exposures to currency risk. An intriguing scenario he presents is a company extending a loan to a subsidiary in foreign currency. Although it isn’t a commercial transaction per se, it’s enveloped with currency risk.
Interestingly, he also points out the increasing role of fintech companies in this landscape. These innovative businesses might raise funds in one currency and issue loans in another. This unique arrangement offers fertile ground for managing both currency and currency risk.
Instruments Used in Currency Management
You’ll come across four major tools in currency management: spot market operations, forward market operations, options, and futures.
Spot Market Operations: A spot transaction occurs immediately. If you buy one currency and pay in another, the settlement and delivery happen ‘on the spot’. While it’s not exactly immediate (it usually takes about two working days to settle), it’s faster than most other transactions. For example, a Euro to Dollar transaction, the most traded currency pair, takes one working day to settle and deliver.
Forward Market Operations: These are like spot transactions, but the key difference is that the settlement and payment don’t occur immediately. Instead, they occur at a future date agreed upon by both parties. This adds complexity to the transaction as it involves interest rates and creditworthiness considerations. To execute a forward transaction, you must make a good faith deposit, often referred to as collateral, to avoid potential issues.
In MacKinlay’s experienced view, understanding these instruments is indispensable for treasury professionals. It equips them to make informed decisions about international transactions, manage currency risk, and steer the business towards smoother and more profitable operations.
Unpacking the Concept of Currency Pairs and Currency Trading
When it comes to foreign exchange and currency management, there are some key terms that Agustin MacKinlay helps us to better understand. Two such terms often come up in these discussions are ‘Currency Pairs’ and ‘Currency Trading’.
Currency Pairs
The term ‘Currency Pairs’ sounds pretty straightforward, and that’s because it is! If we look at the Euro and the Dollar, written as EUR/USD in the finance world, it simply means how many US dollars you need to buy one Euro. The currency pair can also be flipped to show the Euros needed to buy one US dollar. It’s a convention used in foreign exchange and provides an easy way to express exchange rates between two currencies.
While the Euro and Dollar pair is very popular, other widely used currency pairs include the Euro against the British pound and the Dollar against the Japanese yen. Interestingly, as China grows economically, pairs involving the Chinese currency are becoming more common.
Currency Trading
Now, let’s dig into the term ‘Currency Trading.’ This concept involves buying and selling one currency against another. For instance, if you are a Norwegian company wishing to buy 10 million US dollars, you would go to a foreign exchange dealer. This dealer will show you two exchange rates – one for buying dollars and one for selling. The difference between these rates, often quite small, is how the dealer makes money. This can happen either on a spot basis (immediate delivery) or a forward basis (delivery in the future).
However, it’s essential not to overemphasize the term ‘trading.’ While it does involve buying and selling currencies, currency management should not be seen solely as speculation. Trading is just one part of a more extensive process, including pricing and payments.
Understanding Financial Instruments in Currency Management: Swaps and Options
Our guest expert, Agustin MacKinlay, shares valuable insights on two key financial instruments in currency management: swaps and options. Let’s delve into his explanations to better understand these concepts and their application.
The Role of Swaps
A ‘Swap’, as explained by MacKinlay, is where you buy and sell identical amounts of a currency against another, but with different settlement dates. The ‘settlement date’ or ‘value date’ is when the transaction is settled or completed.
Imagine you must buy a million dollars in the future (a forward contract), but a sudden need for a hundred thousand dollars arises much earlier. In this scenario, a swap transaction comes to your rescue. You purchase the needed hundred thousand dollars for settlement in two days and sell those for a date corresponding to your original forward contract. This strategic move not only adjusts your forward transaction to align with your immediate needs but also ensures the necessary cash is available when needed.
Swaps are useful but note that there may be a foreign exchange gain or loss due to fluctuating exchange rates.
Exploring Options
On the other hand, an ‘Option’ provides you with the right, but not the obligation, to buy one currency against another. The beauty of options, according to MaKinlay, is their flexibility – you can decide whether to proceed with the transaction based on the exchange rates on the day of settlement. However, this privilege comes at a cost known as a ‘Premium,’ similar to the fee paid for an insurance policy.
Yet, calculating the premium for options can be complex and might not offer the level of transparency that forward contracts do, making options less appealing for some.
Choosing Between Swaps and Options
When to choose a swap over an option? A swap is a handy adjustment tool for existing forward contracts, especially when you require cash earlier than originally planned. An option, however, is a contingency plan, providing insurance in case you need to buy or sell currency later.
However, due to transparency, MacKinlay emphasizes that swaps and forwards might be preferred over options. Prices for swaps and forwards are typically clear and visible on financial platforms like Bloomberg, while the pricing of options can be a bit murkier, especially for complex ones. This visibility helps maintain trust and transparency, particularly for clients.
Integrating Risk Appetite into Treasury Management and Hedging Strategies
Continuing our conversation with Agustin MacKinlay, we explore the role of ‘risk appetite’ in treasury management and its influence on hedging strategies.
The Impact of Risk Appetite on Currency Management
Risk appetite defines how much financial risk an organization is willing to accept. It mirrors the treasurer’s perspective on underlying risks. MacKinlay underscores that in currency management, risk appetite aims to avoid speculation. Speculation can lead to high-risk financial decisions based on predictions about market directions, which might not always be accurate.
Dealing with these risks calls for strategic tools to negate speculation. MacKinlay suggests automation as one such tool. Automated financial solutions can help manage risks effectively, minimizing potential pitfalls from subjective biases and judgments.
Commercial Transactions, Collections, and Hedging Strategies
In response to Guillaume’s query about using financial instruments based on risk appetite, MacKinlay clarifies that the choice of instruments doesn’t necessarily vary between payments and collections. It’s essential to understand that payments and collections fall under ‘hedging programs.’ A hedging program encompasses all facets of financial transactions, including payments and collections.
Forwards and swaps, despite their value date differences, forwards and swaps are seen as similar instruments for managing payments and collections. This preference is due to their widespread use in currency management and their transparency, as discussed earlier.
MacKinlay maintains that there isn’t a significant difference in using these financial instruments for payments versus collections. As such, they advise companies to utilize the more common and transparent tools, like forwards and swaps, for efficient currency management, whether dealing with payments or collections.
In conclusion, understanding risk appetite and its implications can guide treasurers and CFOs towards more effective and transparent currency management strategies. Automation and widely-used financial instruments, such as forwards and swaps, can help manage risks while maintaining transparency.
Exploring Hedging Programs and Their Real-world Applications
In this section, Agustin MacKinlay delves deeper into our favourite topic: hedging programs. He offers a concrete understanding of these programs and their real-world applications, focusing on currency or FX hedging.
Understanding Hedging Programs
First, let’s break down what hedging means. In simple terms, hedging is about safeguarding against risks in transactions. For example, consider a U.S.-based company that agrees to sell a product for 100,000 Euros, with payment due in three months. To hedge against potential currency fluctuations (transactional FX risk), the company would sell the same amount of Euros in the forward market on the same date the sale was agreed.
Here’s where the ‘magic’ happens. On the settlement day, the company receives the 100,000 Euros from the sale and immediately transfers this to the bank. In return, the bank provides the corresponding value in US dollars, agreed upon at the time of the initial transaction. This process effectively removes the transactional currency risk, with any remaining risk only from interest rate differences.
At its core, a hedge creates a financial position (using a derivative instrument like a forward currency contract) that shifts value in the exact opposite direction to the commercial operation. So, if the Euro to-dollar exchange rate decreases, you’d experience an FX loss on the commercial transaction. But, the financial transaction would increase in value, thus counteracting that loss. This balancing act is the essence of a hedge.
Also, Check: What is Hedging in Financial Risk Management
Different Hedging Programs for Varying Business Characteristics
It’s vital to recognize that not all businesses have the same pricing structures and market pressures. MacKinlay sheds light on the need for different hedging programs based on the unique characteristics of your business.
Some companies deal with ‘dynamic prices’, which update continuously, such as online travel agencies. Others aim to keep prices steady for a set period, like a year or a campaign period and have the flexibility to adjust prices at the start of a new cycle. Lastly, there are firms that, due to competitive pressures, try to maintain their prices as steady as possible for extended periods.
Each scenario calls for a different hedging program, adding layers of complexity and excitement to the world of treasury management.
Hedging a Proportion of Your Commercial Transaction: Is It Viable?
Guillaume asks an interesting question if there’s a possibility to hedge only a portion of your commercial transaction? The example presented was about hedging only $50,000 out of a total transaction worth $100,000. Agustin MacKinlay confirmed that such a method exists, commonly referred to as protecting a budget rate.
Breaking Down the Budget Rate Protection
When aiming to secure your whole budget for a year, it’s not usually advisable to take a hedge for the complete budget forecast at the start. Why? Because it can lead to forecasting risk. Here’s an example: if an unexpected event like a pandemic hits in the middle of your budget period, your commercial transaction’s value could be lower due to the crisis. In such a case, you’d end up being over-hedged – a situation where you have a substantial financial transaction but a lower-value commercial transaction.
So, how do you navigate this risk? Following a prudent way of managing the exposure, just as the host implied.
Initially, you might only hedge some expected budget exposure, say 20 or 40%. You wouldn’t want to leave the rest of the exposure entirely to possible currency fluctuations. That’s where automated hedging programs and ‘conditional FX orders’ come in.
Conditional FX Orders: A Safe Bet
‘Conditional FX orders’ include stop-loss orders and take-profit orders. You’d put in conditional FX orders with the remaining exposure that wasn’t hedged initially.
You divide the remaining exposure into thirds and place three stop-loss orders. If the market doesn’t move in your favour and your worst-case scenario materializes in the currency markets, the average of these three stop-loss orders should match your budget rate. This way, you’re actively managing your exposure to currency risk without necessarily executing hedges all the time, which can be expensive for interest rate reasons.
The Power of Time
One great advantage of this strategy is that it gives you time – the most precious asset for a treasury team. Time allows for fine-tuning cash flow forecasts with real data, not just forecasts. As you fine-tune your forecast, you can adjust the level and size of those conditional orders. This way, the process becomes more efficient over time.
Moreover, as time goes by, you might find netting opportunities. These are scenarios where you don’t need to execute a hedge because a subsidiary has a trade in the opposite direction. Delaying hedge execution can also lessen the impact of unfavorable interest rates.
To sum it up, hedging only a proportion of your commercial transaction is possible and can be a viable approach depending on your business scenario and the type of strategy or program you choose to implement.
Can Industries Use Different Hedging Strategies Based on Their Unique Needs?
Hussam queries if distinct strategies are tailored to different industries, keeping their unique needs in mind. Agustin MacKinlay affirms this, adding that the industry’s pricing characteristics and nature play a vital role in choosing the hedging strategy.
Varied Pricing Characteristics Demand Different Strategies
Agustin explains that companies with dynamic pricing models and those with more static prices might require different hedging strategies. For instance, an online travel agency (OTA) dealing with multiple currencies and fluctuating prices may need a different approach than a factory that places one large order for raw materials each month.
An OTA might deal with minute-to-minute price changes, making traditional budget hedging risky due to high forecasting risk. It’s almost like walking on a tightrope, one miscalculation, and you could fall into the trap of financial instability.
The Role of Software Tools in Hedging
Agustin emphasizes the role of software tools in handling hedging for businesses dealing with small and frequent transactions involving different currency pairs. This sort of business, like an OTA, would be impossible to manage manually.
Imagine having a business with transactions popping up every second and in various currencies. Manual management of such a business can led to errors and be time-consuming. This is where software tools come in. They help aggregate individual pieces of exposure so that you’re not executing a hedge for every small transaction.
Agustin adds that every new sale or purchase order brings in fresh information, changing the exposure value. Software tools can automatically recalculate this, ensuring the hedging strategy stays relevant and effective.
In conclusion, while the strategy may differ from industry to industry, the goal remains: minimizing financial risk while maximizing stability and predictability. The key is to choose the right tools and methods that match your business’s unique pricing characteristics. Remember, there’s no one-size-fits-all when it comes to hedging strategies. Your business is unique, and so should your hedging approach.
Who are the Main Players in the Currency Management World, and How Does Technology Aid Them?
Let’s explore the primary players in the currency management arena. Agustin mentions corporates, currency dealers, and banks as significant participants and introduces the role of technology, specifically software solutions, in managing currency risk.
Major Players in the Currency Management Field
Agustin identifies three key players in the currency management world. They are:
- Corporations: These are the most prominent users of currency management solutions. They use it for commercial purposes and to manage currency risk exposure.
- Currency Dealers: They are crucial in finding buyers and sellers to create a vibrant market.
- Banks: They help facilitate the exchange of currencies and maintain market liquidity, which means you can execute your desired transaction anytime.
The Growing Role of Technology
Over the past few years, a significant development in this field has been the emergence of multi-dealer trading platforms, which automate the execution of forward or spot transactions. Such platforms offer features like “best price execution,” ensuring you get the best possible rate at any given moment.
Not every company prioritizes getting the best price, though. For instance, if a company has an ongoing relationship with a specific bank, it might prefer to process its foreign exchange order through that institution.
These platforms provide flexibility and automation to the trading process, reducing manual effort and increasing efficiency.
Where Does Kantox Fit In?
Kantox, according to Agustin, offers automated software solutions to manage the end-to-end currency management process – from pricing to trading and then post-trading. They emphasize “end-to-end” automation and strive to integrate all parts of the process to optimize currency risk management.
Application Programming Interfaces (APIs) are the technology that underpins these solutions, which enable seamless communication between different software components. This tech piece helps Kantox provide comprehensive, automated solutions for currency risk.
In conclusion, it’s a collaborative effort between players in the currency management world, and technology plays an integral role in making this collaboration effective and efficient. Each player has a unique role; together, they help make currency management smoother and more reliable.
What Is the Typical Lifecycle of An FX Deal, And What Does ‘Exposure’ Mean in This Context?
Hussam and Agustin MacKinlay, in their conversation, dove into the process and intricacies of the lifecycle of a foreign exchange (FX) deal, along with clarifying the term ‘exposure’ within this context.
The Lifecycle of an FX Deal
Agustin explained that an FX deal’s lifecycle could be broken down into three primary phases:
- Pre-trade Phase: This phase involves the identification and collection of exposure data, such as budget forecasts, firm sales orders, invoices, and accounts receivable or payable. It’s like gathering all the puzzle pieces scattered across various systems, like spreadsheets or ERP systems, and putting them together. This allows for a comprehensive understanding of the currency risk. He also emphasized the importance of validation in this stage, which ensures that a hedge is properly authorized and ready for execution.
- Trade Phase: This phase typically involves utilizing multi-dealer trading platforms for the FX deal.
- Post-trade Phase: This final phase includes accounting, reporting, and analytics related to the executed deal.
Understanding ‘Exposure’
In the simplest terms, exposure refers to the potential financial risk your company could face in future dealings due to currency fluctuations. This can take different forms, such as a forecast made during budgeting, firm sales or purchase orders, or even issued invoices. Recognizing these various types of exposure is vital to accurately manage currency risk.
Delving into FX Netting and FX Rate Sourcing
When asked about netting in FX processes, Agustin explained that netting could occur in the pre-trade phase, and it’s essentially about minimizing unnecessary hedges. For example, if one part of your company plans to sell a certain amount of dollars, and another part plans to buy the same amount for the same value date, executing two separate hedges would be inefficient and costly. This principle is known as netting.
Furthermore, Agustin discussed the critical aspect of FX rate sourcing – getting a rate for your FX transaction. The exchange rate used by the commercial team when pricing their transactions can be a significant determinant of the business strategy. He suggested using a good FX rate sourcing process, which involves providing the commercial team with all the rates they need for pricing purposes – spot rates, forward rates, and rates with markups per client set for a desired currency pair.
In conclusion, understanding the lifecycle of an FX deal, grasping the concept of exposure, applying to the net, and having a good FX rate sourcing process are all fundamental for treasury professionals dealing with foreign exchange risk. With these insights, one can better navigate the often-complex world of FX transactions and manage currency risk effectively.
Real-Life Trade Phase in Treasury Operations for US-Based Company Dealing with Euros
Breaking Down the Trade Phase
A trade phase in treasury operations involves the exchange of currencies between two entities. Guillaume asks about how this phase happens in real life, and Agustin MacKinlay breaks it down using a U.S.-based company dealing in euros as an example.
In the scenario described, the company has its operational costs in dollars, the currency in which they present their financial statements, also known as the functional currency. This company also has a planned sale in Euros. Ideally, the trade phase coincides with the transaction’s closing; the company sells the corresponding amount of Euros through a multi-dealer trading platform with a value set to coincide with the settlement of the sale.
The Ideal Trade Scenario
In a perfect world, the cash received from the commercial transaction is used to settle the financial transaction. Remember, when a company agrees to trade a specific currency, they enter into a contractual agreement. So, in our example, the company has to deliver those 100,000 Euros to the bank in return for dollars. If everything runs smoothly, payments shouldn’t be a major issue.
Reality Check: The Need for Swaps
However, in reality, the cash flow moments of the commercial transaction might not perfectly align with the value date of the financial transaction. That’s where swaps come into play.
In the treasury world, swaps are contracts that enable companies to exchange cash flows, allowing them to better manage currency risk. However, manually executing swaps can be time-consuming, resource-intensive, and prone to errors or fraudulent activities.
The Solution: Automation
To combat these potential pitfalls, automation is key. MacKinlay highlights that currency management automation solutions can streamline the process, reducing the risk of errors and unethical behaviour.
Therefore, while the trade phase can seem straightforward, many intricacies exist for a successful transaction. Automation solutions are critical in ensuring this process is smooth and error-free.
Post-Trade Phase: Reporting and Automation in Treasury Operations
Post-Trade: It’s Not Over Yet
Once the trade phase is complete, you might think it’s time to kick back and relax, but Agustin MacKinlay informs us that this is not the case. Despite the common misconception that the workload ends at the trade phase, more work must be done. There’s the involvement of accounting, reporting, and analytics, which can present some challenges.
Accounting Challenges: Balancing the Books
Accountants are trained to recognize a transaction on the company’s books when an invoice is issued. However, in some instances, such as forecasted exposures, the corresponding forex transaction might be executed before the invoice is recognized. This situation could lead to confusion.
For instance, your business might gain foreign exchange from your commercial exposure. Yet, because the corresponding invoice has not been issued, it’s not recognized. Simultaneously, you might have a forex loss on your forward position. This offsetting transaction situation can lead to confusion, especially when one gain or loss is recognized, and the other is not.
Hedge Accounting to the Rescue
To tackle this confusion, companies can use hedge accounting, a principle allowing them to temporarily shift forex gains and losses from the profit & loss account. While this strategy requires significant work and can be expensive, automation can simplify compiling all that information. Remember, automation removes tasks, not jobs!
Reporting and Analytics: Essential Internal Tools
Reporting and analytics come next, which are crucial for assessing your performance, evaluating your hedges’ effectiveness, and measuring key performance indicators (KPIs). These factors will vary depending on your program.
Ideally, you’ll want a reporting system that provides real-time information about your hedges’ impact, your most significant sources of risk, and your performance. This system should present data in an easily understandable and readable format with data segregation capabilities for sensitive information.
Automation: The Future of Currency Management
According to a recent HSBC survey, MacKinlay ends by highlighting the importance of better analytics systems, which around 80% of CFOs desire. With the advancements in technology, this is possible through currency management automation.
So, while the trade phase might seem like the crux of the operation, what follows is just as important. From accounting to reporting and analytics, post-trade processes are integral to successful treasury operations.
Understanding Forex Gain and Loss in Hedging and Reporting
Forex Gain and Loss: The Balancing Act
If you’re having a tough time understanding the concept of forex gain and loss when hedging, don’t worry, it’s a complex concept, but Agustin MacKinlay offers a clear explanation.
Imagine you’re a US producer saving in euros. If the Euro depreciates during the time between when you agree to a transaction and when it’s settled, the value of your commercial transaction decreases. However, your forward transaction (because you sold the euros) will do the opposite. The exchange rate will be lower, creating a forex gain that offsets the forex loss from your commercial transaction.
One thing to note here is that you’re correct in saying that any gains made from hedging must be declared in your profit & loss statement.
The Impact of Interest Rates
Interest rates are another crucial factor in this equation, as they can greatly affect your net foreign exchange gains and losses. Let’s look at this through a non-technical lens.
Some currencies are seen as safer than others. For example, the Swiss Franc is considered one of the strongest and safest currencies, leading to very low-interest rates. On the other hand, emerging market currencies, which are perceived as riskier, will have higher interest rates.
This difference between interest rates can impact your net forex gains and losses, particularly when dealing with different currency types.
High Cost of Hedging: A Real-world Example
Let’s say you’re a Swiss-based company selling Mexican pesos. As the Mexican peso is considered riskier than the Swiss Franc, you won’t get as many Swiss Francs for your pesos as you would in the spot market. This situation creates a “high cost of hedging.”
Depending on the differences between the spot and forward rates, these costs can sometimes be in your favour (termed as “favourable forward points”) or against you (termed as “unfavourable forward points”). These nuances are key to understanding the dynamic of forex gains and losses.
So, understanding the concept of forex gain and loss when hedging, how it’s reported, and the factors that affect it, such as interest rates, is essential to treasury operations. Don’t worry if it seems complicated at first – as with most things in the treasury, practice makes perfect!
How Does Kantox Function and Integrate into The Trading Life Cycle?
Kantox, a finance solution platform, contributes uniquely to the trading lifecycle, as described by Agustin MacKinlay. To help you get a better understanding, let’s unpack this information into bite-sized points.
Kantox Case Study: Via FAMA
The French pharmaceutical company, Via FAMA, had a high cost of hedging because they sold their products in emerging markets. Since their base currency, Euro, is stronger than the currencies of the emerging markets, and the company had to accept a lower amount in forward markets. Here’s how Kantox stepped in:
- Kantox implemented a system to automate and delay the execution of hedges. This allowed the company to reduce the financial cost linked to hedging.
- Using Kantox’s dynamic hedging solution, Via FAMA gathered and processed information about their currency exposure from different sources, including their subsidiaries and headquarters. This information was used to create conditional orders that delayed the execution of hedges.
- Besides saving costs, the company freed its treasury team from manual tasks. This lets them devote more time to value-adding tasks, like expanding to more currency pairs and focusing on growth.
- Kantox’s automation process removed tasks and allowed Via Fama to operate in more profitable currencies, enhancing their profit margins.
Integrating Kantox into Corporate Systems
Now, let’s focus on how Kantox fits into the corporate structure. It uses application programming interfaces (APIs) to do this. APIs allow different software systems to communicate with each other. This integration is vital in various stages, including:
- Gathering and processing exposure: The APIs help obtain and handle the company’s currency exposure data.
- Pricing: APIs transmit the foreign exchange (FX) rate information, which includes forward rates and markups, to the commercial team.
- Post-rate phase: APIs ensure traceability, important for tracking individual hedges to the forecasted exposure. This information is needed to make the necessary adjustments and perform accounting tasks.
MacKinlay emphasizes that beyond the technical side of things, the business side of automation is crucial. By embracing currencies with confidence, companies can capture growth opportunities, protect and enhance their competitive positions, improve profit margins, and contribute towards enhancing the firm’s value. That, in essence, is the key lesson for new treasurers stepping into currency risk management.
Wrapping it Up
Mastering the intricate facets of trading, treasury management, and financial risk mitigation may appear daunting, but with tools like Kantox and strategies grounded in a deep understanding of the financial landscape, you can overcome these complexities. Remembering the role technology plays in optimizing financial processes and enabling better decision-making is essential. APIs, in particular, are powerful tools that facilitate seamless communication between different software systems, aiding in gathering and processing exposure, pricing, and post-rate traceability.
Perhaps the most crucial takeaway from this discussion is the ethos of ’embracing currencies with confidence.’ By managing the process effectively and utilizing smart technology, you can harness the power of currencies to capture growth opportunities, safeguard your competitive position, and improve your profit margins.
No matter what stage of the treasury journey you’re at, this approach will help you navigate the turbulent waters of financial risk management and propel your organization towards enhanced growth and profitability. It’s about transforming challenges into opportunities and turning risk into growth – a powerful mantra for all treasury professionals. Remember, automation removes tasks, not jobs. It frees up your time to focus on what truly matters: fostering growth, scaling the business, and driving profitability.
Embrace currencies, adopt technology, and redefine treasury management for the better.
