An API (Application Programming Interface) is a mechanism for one system to talk to another. APIs are used as a communication channel between systems within the same organisation and/or used externally between systems of one organisation and another. Either way, the use of an API is an efficient and secure way (provided they have been developed appropriately) to exchange data. Hedgebook was built using private APIs (in-house APIs used to pass information between the back-end and front-end of the Hedgebook application) but this year has seen the launch of Hedgebook’s public API. Who cares? Well, if you are a bank or currency broker with hundreds/thousands of customers and you want to use Hedgebook to visualise and share your customers’ hedging position then an API allows the transfer of the deal data from your system to Hedgebook efficiently and securely. Your IT teams will certainly care that there is an API available.

The deal loading component of the API allows banks and FX brokers to provide their customers’ fx deal information straight into Hedgebook. No manual input. No CSV uploading. Information can be delivered to Hedgebook anywhere from once per day to real-time. The FX sales desks of banks/brokers are understandably not interested in the mechanics of how info is loaded (it just needs to be correct with minimal effort). It is the resulting level of insight at their fingertips that is the value proposition. The deal loading component of the API is a crucial linkage between the bank/broker systems and Hedgebook which leads to the visual representation and deeper understanding of the data. Sales teams don’t have to worry about manually representing the complicated option structures they sell. Hedgebook translates these structures in an easy to understand way which benefits both the bank/broker and their customers. The API works both ways i.e. it allows banks/brokers to send Hedgebook deal information but it also allows them to retrieve information on the deals and their valuations. The data can be fed into data warehouses which gives these organisations the ability to write their own reports and put their own slant on the information.

Providing Hedgebook to the bank/brokers customers pre-populated with their trade information is a fantastic value add tool for the customer. The insights and conversations are targeted. Strategy/decision making made easier. The API facilitates this.

Our testing environment enables development teams to safely experiment with our API, whilst our full documentation and customer support facilitates easy integration. Documentation and access to the UAT environment is available on request.

Talk to us to find out more.

The purpose of this post is to provide a worked example of how a Participating Forward is represented in Hedgebook’s Exposure Tool. A Participating Forward is a structured option which provides a known worst-case rate (Protection Rate) and the ability to participate in favourable movements for a portion of the structure (often 50%).

In this example, a UK based importer has USD costs that are being hedged with the following Participating Forward:

On expiry of the participating forward:

– If the spot rate is lower than the strike rate (1.1850) the importer will transact the Protection Amount ($1,000,000) at the strike rate (1.1850).

– If the spot rate is higher than the strike rate (1.1850) the importer will transact the obligation percentage amount ($500,000) at the strike rate (1.1850) leaving the remaining $500,000 to be transacted at the higher market rate.

Prevailing Market Rates

When the Exposure Tool is first launched, the displayed position is determined by the prevailing market rate. In our example the market rate was 1.2338:

The forward rate for Nov 2019 (the month the Participating Forward expires) is 1.2367. Hedgebook compares the forward rate to the strike of the Participating Forward to determine how the position is displayed. Since 1.2367 is higher than the strike rate (1.1850) 50% (the obligation percentage) of the Protection Amount is deemed to be transacted at the strike rate, 50% is assumed to be transacted at the more advantageous market rate.

The solid blue area of the bar represents the portion of the hedge that is transacted at the strike rate ($500,000 at 1.1850). The shaded area of the bar represents the portion of the hedge that would be transacted at the market rate ($500,000 at 1.2367).

In this scenario, the Exposure Tool shows $500,000 of hedging at the strike rate of 1.1850 and $500,000 of an “unhedged” amount i.e. the portion that can be bought at the more advantageous prevailing market rate. The combined rate, or Indicative Achievable Rate, is the weighted average rate of 1.21085 (average of 1.2367 and 1.1850). In our example the Forecasted Cashflow is equal to the Protection Amount of the Participating Forward.

If the Forecasted Cashflow was greater than the Protection Amount, the Indicative Achievable Rate would include the difference between the Forecasted Cashflow and the Protection Amount balance at the prevailing market forward rate. For example, if the Forecasted Cashflow was $2 million, $500,000 would be hedged at 1.1850 and the remaining $1.5 million would be transacted at the prevailing market rate.

In our example the prevailing market rates are higher than the strike of the Participating Forward, therefore, no matter how far to the right (stronger GBP) we drag the Exposure Tool slider there is only $500k hedged at the strike 1.1850, the balance will be transacted at the more advantageous/higher rates.

Currency P&L Impact

The Exposure Tool calculates the Currency P&L Impact of hypothetical movements in the exchange rate. When the Exposure Tool is first launched the Currency P&L Impact is zero i.e. the prevailing market rates set the base from which hypothetical movements are compared. So, initially, the Hedge Rate (current) and Hedge rate (scenario) overlap, so too the Achievable Rate (current) and Achievable Rate (scenario). Since we have only included a single month of exposure and hedging (Nov 2019) the rest of the Achievable Rate line tracks the scenario forward curve.

Hypothetical Exchange Rate Scenarios

When we simulate hypothetical exchange rate scenarios by moving the slider at the top of Exposure Tool, Hedgebook calculates the impact on the Participating Forward and the P&L impact.

Let’s consider the impact of a 5% weakening of the GBP/USD exchange rate:

The market rate (1.1750, the implied Nov 2019 forward rate) is below the strike of the option (1.1850) so the bar is solid blue indicating that the full Protection Amount of $1,000,000 will be exercised at the strike rate. The Hedged Rate and the Achievable Rate are the same (1.1850).

By moving the slider away from the prevailing market rate, we create a P&L impact:

The Currency P&L Impact is calculated by the difference in the Achievable Rates i.e. ($1,000,000/1.21085) – ($1,000,000/1.1850) = -£18,017. The importer is £18,017 worse off if the GBP/USD exchange rate falls 5% from current rates.

For the importer, a stronger GBP/USD exchange rate has a positive P&L impact as the amount of GBP required to purchase the same amount of USD is less. If we simulate a 5% stronger GBP we get the following profile:

A +5% movement implies a Nov 19 market rate of 1.2984. The solid blue represents the obligation amount at 1.1850. The shaded amount is assumed to be transacted at the more advantageous market rate. The implied Achievable Rate is 1.2417.
The difference between the current rates and the +5% scenario creates a positive P&L impact of +£20,516 (1,000,000/1.21085) – (1,000,000/1.2417).

Hopefully the above explains the methodology of the Exposure Tool when considering a Participating Forward. Any questions can be directed to


The reaction from our partners and corporate clients to the launch of Hedgebook’s Exposure Tool has been hugely satisfying. The Exposure Tool combines foreign currency cashflow forecasts with fx hedging derivatives to provide a clear visualisation of the company’s hedging position. Moving seemlessly between time horizons, currency pairs and hypothetical exchange rate movements enables users to gain a deeper understanding of their position under both prevailing market rates and hypothetical scenarios.

Sharing the information between the customer and their bank/broker/advisor allows discussions to focus on the gnarly stuff without wasting time getting to the starting position. Strategies can be formulated, impacts on the hedging position analysed (including against risk control limits) prior to entering new transactions.

For users of path dependent options where the amount or hedged rate can change under different market conditions the Exposure Tool brings absolute clarity. Experience has told us that businesses entering FX derivatives (for all the right reasons) often have difficulty articulating the structures and the potential outcomes that the business is exposed to. The Exposure Tool distills the complexity of FX hedging to easy to understand outcomes.  

Contact Us to find out more.

It is safe to say that the audit industry is currently under quite a bit of scrutiny.

Through my conversations with a cross section of accounting practices across the UK, Europe and North America there is a general consensus that audits are getting more complex at the same time as fees are increasingly coming under pressure. The amount of effort required to complete an audit is increasing, as the regulations become stricter and the risk of penalties more likely.

It is not just the audit firms themselves feeling the pressure, regulators are also under fire. The UK’s Financial Reporting Council (FRC) has received plenty of criticism over the past year or so for its perceived leniency. An independent review by Sir John Kingman at the end of last year recommended that the FRC be replaced with an independent statutory regulator, accountable to Parliament, with a new mandate, new clarity of mission, new leadership and new powers.

This criticism has caused the audit watchdog in the last year to nearly treble its fines against audit firms. In monetary terms this is an increase from £15.5m in 2017 to over £43m in 2018. The number of fines rose from 11 to 27.

The FRC’s clear message to the audit industry has not just come in the form of financial sanctions. The watchdog struck off six individuals from memberships of professional bodies and increased non-financial sanctions almost 250% from 11 in 2017 to 38 in 2018. “The significant increase in the number, range and severity of sanctions sends a clear message that where behaviour falls short of what is required, we will hold those responsible to account,” said Elizabeth Barrett, executive counsel of the FRC.

What does all this mean for audit firms? To state the obvious, with regulations getting tighter and sanctions more severe and frequent, there is a need for firms to adapt to this changing environment. One area that can help improve audit quality is leveraging technology. Paul Winrow, Director of Professional Standards at Baker Tilly Global said “We believe that our member firms around the world will be able to benefit from software to deliver high quality audit work.”

Faster adoption of technology won’t make the regulators reduce their scrutiny of audit firms, but it will certainly help a host of partners sleep better at night.

As a guest speaker at a recent, global accounting network event I was very interested to hear a robust discussion focused on the subjective area of “materiality”. The unsurprising, and somewhat unsatisfactory, conclusion from the room was that determining materiality depended on a number of different factors, and that there was no “golden rule”. Not the preferred answer for a room full of accountants. What is clear, though, is that to determine materiality one must first of all calculate the numbers before judging what is material or not.

From a financial instrument valuation perspective, my take on materiality is slightly different.

The complex nature of financial instruments means that auditors cannot simply rely on the client provided valuations and use these to judge materiality. It is a big assumption that the valuations are, indeed, correct. Valuations need to be cross-checked to ensure the starting point of deciding whether they are material is valid.

There are two important points to remember with this. Firstly, banks are often the source of clients’ valuations and they can, and do, get it wrong. The disclaimer at the bottom of any counterparty provided valuation is testament to this. The message that valuations should not be relied upon comes through loud and clear. There is plenty of scope for human error in the process of calculating financial instrument valuations. We see it regularly, when we are asked to check valuations. Despite the disclaimers it is understandable that companies do actually rely on the valuations for financial reporting purposes, particularly small and mid-size companies as they often don’t have access to the systems to value these instruments themselves.

So, as an auditor, you need to check the valuation. If not, what might at face value be regarded as immaterial might in fact be quite the opposite. The correct valuation may well be material. Again, we have seen plenty examples of this. Auditors need to look at the underlying transaction. If the notional amounts are large, or maturing a long way out into the future, then you need to check the valuation. The correct valuation is unlikely to be small due to financial market volatility.

Interest rate swaps are a good example of this. They tend to be large notional amounts and maturing in more than twelve months’ time, sometimes out 10 or 15 years. Equally, with foreign exchange contracts you need to look at the maturity date and the notional amounts being bought and sold to be able to make an informed decision on whether the results are likely to be material or not.

If there is found to be a material difference in the financial instrument valuation, it is better to find it before the audit is complete, rather than after. No one wants to have that discussion with the CFO or Finance Director about having to restate the accounts.

So next time you get involved in that riveting conversation about materiality don’t forget to look behind the numbers.


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