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We have discussed CVA at length in our newsletter and blog as it is arguably the most significant change to the accounting standards, from a financial instruments valuation perspective, since hedge accounting was introduced. The standard relating to CVA, IFRS 13, was developed as a result of the Global Financial Crisis. It became apparent that credit risk had been mispriced for a long time in the lead up to the implosion of the credit markets in 2008/2009. IFRS 13 forces organisations to include an adjustment to financial instruments to represent a credit component – both for the reporting entity as well as the counterparty. The adjustment can be a reasonably immaterial number impacted by factors such as the remaining term to maturity and how far in- or out-of-the-money the derivatives are.

Some companies argue that the relative immateriality of the credit adjustment reduces the necessity of quantifying the credit component, to the extent that some companies are not bothering to do it. We understand that view as IFRS 13 seems like another regulatory requirement that adds little value to the business. However, the standard is explicit in its language that “fair value”, by definition, includes credit, therefore, the decision to do nothing about it cannot pass muster with the auditor.

A contributing factor to the “immateriality” argument is the prevailing benign credit conditions. The credit spread of banks can be observed through the Credit Default Swaps (“CDS”) market. A CDS is like an insurance policy – it compensates the holder of the policy if the underlying entity defaults on its debt obligations. As the chart below shows the credit quality of the big 4 Australian banks has been improving since the spike in 2011 and has continued to retrace back to levels that prevailed pre GFC. The resulting effect is to reduce the credit valuation impact on out-of-the-money derivatives (current exposure method). We would argue that although credit conditions have returned to benign levels it is only a matter of time before another credit shock occurs and companies will be better prepared to quantify such impacts if they already have a tried and tested methodology in place. Our Hedgebook clients benefit from the system’s low cost, easy to use CVA module.

Big 4 CDS 3 year

At Hedgebook we are committed to providing economical solutions to assist the treasury function. Our low cost software, HedgebookPro, provides a treasury management system (“TMS”) entry point for companies that have historically relied on spreadsheets to manage their foreign exchange and interest rate exposures. HedgebookPro is also an alternative for companies that already use a TMS to capture their vanilla derivatives and feel they do not use the full functionality offered by these larger and more expensive systems.

We take a similar approach to financial market data through our company Infoscan. Hedgebook purchased the Infoscan business 12 or so months ago as it is a natural fit for Hedgebook. Many New Zealand market participants of a certain age will remember the Infoscan pagers – they carried a certain cachet at the time! Data is delivered to smartphones these days.

Many companies with exposure to foreign exchange and interest rate markets cannot justify the cost of a Bloomberg or Thomson Reuters product. Websites are OK for accessing spot fx rates on a rough and ready basis but are unsatisfactory for providing the required comfort when entering into larger derivative transactions. Infoscan gives users the visibility over real-time market spot fx rates but, more critically, the fx forward market too. As mentioned, free websites can give an indication of spot rates but accessing accurate forward point information is harder to ascertain.

Whether transacting a new FEC, or adjusting an existing one through pre-deliveries and extensions, it is important for decision makers to have good information at hand regarding the prevailing forward market. Transparency of the forward points provides greater confidence that a competitive market rate is achieved.

Infoscan can deliver data in a number of ways either through a website login or, alternatively, directly into spreadsheets. Like HedgebookPro the market data functionality is delivered in a no fuss, low cost manner and helps enhance fx conversion rates.

An important aspect of most companies marketing strategy these days is via their website. At Hedgebook we spend lots of time developing our derivative hedging software and have to date been somewhat remiss in the development of our web presence. We have taken some initial steps to address this by adding some extra information about the company and the individuals behind the company. We have also included some more technical aspects regarding the operations of the company, hosting of the application and disaster recovery. Additionally, we now display a selection of fx rates, interest rate swap rates and metals prices on our home page. The rates are live and update every five seconds. The aim is to provide a quick view of the key rates Hedgebook users care about.

We have also released an update to the Hedgebook application. We are constantly working on changes and improvements to the valuation and reporting software to give users either access to new instruments and features, or making existing ones more intuitive and easier to use. The most material changes from this software update include exposing the cashflow map for amortising interest rate swaps and we have also streamlined the reporting functionality.

Feedback always welcome.

Hedgebook is pleased to announce the launch of the free demo version of its flagship product HedgebookPro.

Potential users now have the ability to try before they buy. Simply go to the HedgebookPro website (www.hedgebookpro.com) and click on the big red button (it’s hard to miss). Fill in your details and we will send an email link of your login details so you can have a decent gander at the full functionality of HedgebookPro.

If you like what you see we can set you up with your own account by emailing us at enquire@hedgebook.co.nz. It’s as simple as that.

Give it a try and join the legion of users accessing the most cost-effective little treasury system known to man.

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