Author Archive for Duncan Shaw

Somewhat ironically, it is our observation that structured option products for FX hedging are heavily used by small-to-mid sized commercial firms and often overlooked by larger organisations. Many treasury policies exclude exotic options, unless approved by the board as an exception. No question there is a level of complexity about structured options but they do have a place in a hedging programme when trying to achieve extra FX gains, within acceptable risk parameters. We have witnessed first-hand simple businesses that have an FX hedge portfolio entirely made up of complex structured options, arguably inappropriate for the size and (non) complex nature of the business. At the other end of the spectrum there are sophisticated companies with experienced treasury personnel that are prohibited from transacting any “non-vanilla” structures.

As with most things in life it is about striking a balance. A hedge portfolio should consist of a mix of instruments from the vanilla end of the spectrum such as FX forwards, to the more esoteric such as barrier options and leverage. Crucially, the company entering the option structure must understand the potential outcomes. The litmus test for this is being able to explain it to management/the board.
Trying to manage these instruments within a spreadsheet is a fraught exercise and will likely lead to misrepresenting the hedge profile. The sellers of these type of options e.g. banks and FX brokers, want to ensure they have done so in an entirely responsible manner. New regulations such as PRIIPS put the onus on sellers of options to ensure the buyer understands exactly what they are committing to. From the buyers perspective, understanding the hedge position and the potential profitability impact from movements in exchange rates is vitally important.

Hedgebook has continued to add to its library of instruments – the latest being knock-ins and knock-outs. Although these types of instruments may not be suitable for everyone, Hedgebook provides the confidence to both the banks/brokers selling option structures, and the companies buying them, that they are being sold/managed appropriately and any future surprises at expiry are removed. The recent return of volatility to financial markets has served as a reminder of how quickly conditions can change.
Related article: https://www.hedgebookpro.com/blog/impact-path-dependent-options/

Did you know that the UK accounting watchdog, the Financial Reporting Council, nearly doubled its fines to £12.8m last year for non-compliance with FRS102 when conducting audits?

A common area of non-compliance for audit firms is the requirement to independently value financial instruments, for example, FX forwards, options and interest rate swaps. No longer can audit firms can simply rely on the bank valuations provided by their clients.
Recently Hedgebook attended the 2018 FRC Priorities Meeting. There was a big focus on compliance with FRS102 and the potential non-financial sanctions of not independently checking financial instrument valuations. These non-financial sanctions include placing restrictions on Partners and the work they can bid for, as well as prohibiting a firm from entering in to any new audit business for a set period. Obviously, this would be extremely damaging to a firm or Partners’ reputation, as well as having financial implications. Below is a diagram detailing the FRC’s Enforcement Process, as well as a link to FRS102.

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Hedgebook Audit gives auditors access to an affordable and efficient tool to validate their audit clients’ financial instrument valuations. For more information or a demo of Hedgebook Audit get in touch on will.rush@hedgebookpro.com or call +44(0) 7501 765005.

It has been twelve months since Hedgebook’s CEO, Richard Eaddy, packed his bags and headed to London to spread the Hedgebook gospel. The success over this time has validated Hedgebook’s relevance for the UK/European market and has provided the confidence and necessity to strengthen the team. This year, two new special humans have joined the UK office, tasked with deepening existing Hedgebook relationships and partnerships as well as creating new ones.

Nathan Cox

Nathan joined Hedgebook to lead our banking and broker partnerships in the UK. No stranger to FX markets, Nathan has more than fifteen years’ experience leading international business development and expansion projects for both the public and private sectors. Prior to joining Hedgebook, Nathan was the Head of Partnerships at a London-based foreign exchange brokerage. There he developed new partnership channels with financial and professional services partners to drive greater mutual business development and marketing outcomes. Nathan worked in New Zealand and Australia before settling in the UK where he has resided since 2007. As an Arsenal fan he covers his downside with ongoing support of the All Blacks.

Will Rush

Will joined Hedgebook at the start of 2018 to lead the business development efforts for Hedgebook Audit. Independent valuations of financial instruments is increasingly a focus for audit firms and Will is tasked with introducing these firms to an efficient and economic way to do it (https://www.hedgebookpro.com/hedgebook-audit/). Will brings his relationship building skills to Hedgebook with eight years business development and sales experience across the recruitment, outplacement and FMCG industries, most recently at an international recruitment business where he spent time working in Australia. He then came back to London to assist people who were looking to migrate from the UK to Australia or New Zealand eventually moving to business development for their HR consultancy arm. To build his domain knowledge he has immersed himself in technical accounting! Will is an avid rugby fan and still attempts to play, turning out for his local side’s 1st XV most weekends then hobbling in to work on Monday morning.

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As Hedgebook spreads its wings to new jurisdictions, it is appropriate that this edition of Rickshaw features a non-Australian or New Zealand company.

ALSO’s head office is in Switzerland and provides a B2B market place for the Information and Communications Technology (“ICT”) industry. ALSO bundles logistics services, financial services, supply services, solution services, digital services, and IT services together into individual service packages.

With over 3,500 employees, EUR8 billion of sales and serving 15 countries across Europe ALSO is, by NZ standards, a large company. Although the size of the numbers is larger, the instruments used for hedging are the same.

As a user of interest rate swaps to manage the company’s interest rate risks, fair value of the derivatives is an important aspect of interim and year-end financial reporting (ALSO is listed on the SIX Swiss Exchange). Hedgebook provides these valuations as well as the hedge effectiveness testing aspect of hedge accounting.

The increased reporting requirements of the over-the-counter (“OTC”) derivatives market following the GFC has emphasised the need for strong systems. “Strong” does not have to mean “expensive” or “complex”. Hedgebook provides the valuations required for financial reporting obligations, with the minimum of fuss.

Given the low interest rate environment that global financial markets have been in for a decade it is understandable for borrowers to become complacent about managing interest rate risk. Hindsight is a wonderful thing, but I’m sure there are many finance professionals that would look back at decisions to hedge interest rate risk using pay fixed rate swaps with a tinge of regret, and are keen to have a larger exposure to floating rates. Interest rates have remained lower for much longer than many thought would be the case.

In response to this low interest rate environment, we have seen an increase in interest rate hedging activity using interest rate options. An interest rate option allows the borrower to enjoy low floating rates whilst also having some protection against higher rates. Many companies that use interest rate derivatives do so within the framework of a treasury policy. The interest rate hedging risk control limits enforce a minimum amount of fixed rate hedging to be in place at all times. Interest rate options, such as caps and collars, provide the dual benefit of qualifying as hedging but allowing the holder of the option to pay floating rates up to the level of the cap (and down to the level of the floor in the case of a collar structure).

In response, Hedgebook has developed interest rate option functionality so that these instruments can be appropriately recorded, reported and valued.

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