Currency analytics

Companies that do business in more than one currency are exposed to exchange rate risk – that is, changes in the value of one currency versus another. Exchange rate risk (also known as foreign exchange risk, FX risk, or currency risk) is especially high in periods of high currency volatility.

Currency analytics are technology tools that enable global companies to manage the risk associated with currency volatility. Currency analytics often involve automation that helps companies access and validate currency exposure data and make decisions that mitigate currency risk.

How global companies use currency analytics to manage risk

Currency volatility can impact a company’s balance sheet and/or cash flow. Corporate currency analytics help companies manage currency risk in both areas.

Balance sheet risk

In the process of remeasuring transaction currency monetary assets and liability account balances, the difference between the exchange rate when the transaction was posted and exchange rate when the transaction was cleared goes to the functional entity’s income statement as an FX gain or loss. Then in the process of translating the functional entity’s income statement for the reporting entity’s consolidated income statement, that FX gain/loss gets translated at current income statement rate to reporting currency and appears on the consolidated income statement.

Managing balance sheet risk can involve organic (natural) hedging such as using cash positions or intercompany loans to create exposure offsets. It can also involve external hedging such as buying a forward contract to offset FX exposure.

In both cases, efficient hedging depends on being able to drill down into the balance sheet to see the currencies of the transactions sitting on the company’s books around the world. Currency analytics automates that drill-down process and presents balance sheet exposure data in an easy-to-use dashboard that allows companies to efficiently manage balance sheet risk and minimize FX gain/loss.

Cash flow risk

In the process of translating the functional entity’s income statement, revenue, cost of goods sold (COGS), and operating expenses (OpEx) get translated at the current income statement rate to reporting currency and appear on the consolidated income statement. Currency impact to revenue, COGS, and OpEx arises from differences between the current income statement rate and the forecasted rate.

Managing cash flow risk is fundamentally about protecting the economic value of the company’s future flow of cash from being eroded by currency volatility. It can involve organic (natural) hedging such as pricing contracts in a particular currency. It can also involve external hedging, but accounting rules require matching hedges to forecasted cash flows and don’t allow hedging economic risk.

Currency analytics allow companies to mitigate cash flow risk by uncovering accounting exposures to match the economic exposures so the company can hedge the accounting exposure as a proxy. Currency analytics enable what/if scenario analysis so companies can model how volatility in particular currencies could impact their revenue and expenses in the future.

Currency analytics software vendors

FiREapps – Helps corporate treasury and finance teams get visibility in days and FX impacts under $.01 EPS in just two quarters without IT development or maintenance.

IT2 Foreign Exchange Exposure Management – Collects and consolidates enterprise-wide FX exposure information and FX hedging transactions and consolidates the data for analysis and action.

Kyriba – Exposure management, mark-to-market, and hedge accounting solutions to support corporate hedging programs and regulatory compliance.

Reval Cloud Platform for Treasury and Risk Management – Empowers financial executives with robust functionality to support complex decision making.

References

Euromoney, “FX data analytics: banks’ new frontier,” 2 Jul 2015. http://www.euromoney.com/Article/3467575/FX-data-analytics-banks-new-frontier.html

Wall Street Journal, “Using Software to Manage Currency Risk,” 27 Feb 2012. http://www.wsj.com/articles/SB10001424052970203806504577178570179678332

JPMorgan Chase, “Foreign exchange risk management.” https://www.chase.com/content/dam/chasecom/en/commercial-bank/documents/foreign-exchange-risk-management.pdf

Treasury & Risk, “Cash Flow Hedging Best Practices,” 28 Jan 2014. http://www.treasuryandrisk.com/2014/01/28/cash-flow-hedging-best-practices?t=treasury-management