There can be no greater affirmation of the global movement towards digitalisation than the world’s biggest firms putting their considerable resources to work. The launch of PwC’s Next platform gives small and mid-sized businesses access to the tools to grow quicker, work smarter and level the playing field against the big boys. Hedgebook will be available on the Next platform alongside a growing number of other smart and leading edge apps.
We often encounter a common misconception among SME importers and exporters that the FX hedging market is the domain of the “big boys”. SME importers and exporters often believe that the use of financial instruments such as FX forwards and options are for “large” foreign currency costs and/or sales receipts. However, the definition of “large” is obviously subjective; the more crucial consideration is one of materiality. If the importer or exporter has the luxury of being a price maker and can pass through the impact of foreign currency movements to the customer/supplier then there is less necessity to hedge. Many businesses are not fortunate enough to be in this situation. Rather, adverse movements in foreign exchange rates have a direct impact on margins and profits. So how much foreign currency exposure warrants hedging through derivatives and what are the administrative costs of doing so? As a rule of thumb if the company has on average >$50,000 of monthly FX exposures then there is merit in taking a more active approach to managing the risk, as opposed to passively transacting at the prevailing spot rate on the day. Of course this needs to be put into context of total revenue.
Having determined that the FX exposure warrants hedging, there are further important considerations of an FX hedging programme:
- Does the company have the knowledge base to transact and manage FX derivatives? There may be a certain level of education required before committing the company to financial obligations. There are many resources available to aid the understanding of the common financial instruments available for hedging purposes. On-line resources are plentiful. Banks and brokers are always available for training sessions, too. This is mutually beneficial. Banks and brokers make money from the FX transactions, whilst the company is put in a better position to manage and mitigate FX exposures.
- Does the company have the systems and processes to transact and manage FX derivatives? Derivatives such as FX forwards and options require recording, reporting and valuing. Until relatively recently many companies were reliant on spreadsheets and bank valuations to manage FX derivatives as systems were prohibitively expensive. With the advent of cloud based systems, SME companies have access to systems at a fraction of the cost of more traditional solutions. Systems allow better management of derivatives, give better visibility over exposures, in turn increasing confidence to enter hedging. Systems allow more time to be spent on strategic decision making.
So the hurdle to entering FX hedging is not so much one of quantum, but more about having the skill set and systems to adequately manage a portfolio of derivatives. There is a wealth of resources available to help transition a company into a hedging programme and take the volatility out of profit outcomes.
For a closer look at the fundamentals of FX hedging download our Dollars & Sense eBook.
In the very early days of Hedgebook, the software was developed solely as a derivative valuation tool. Over time, additional functionality was introduced to include a suite of reports. The reporting supports both the day-to-day administration of the treasury function such as cashflow and accrued interest reports from an interest rate management perspective, as well as strategic/decision making tools.
In the latest release of the software we have focused on enhancing the debt module. A significant number of the Hedgebook client base has debt of one kind or another. The debt is a combination of short and long term instruments e.g. term borrowing, commercial paper, floating rate notes and fixed rate bonds. For corporate clients the bank is the main source of funding
For Councils there is also the LGFA (Local Government Funding Agency). The LGFA can lend to New Zealand Local Government on a fixed or floating rate basis across the yield curve. Historically funding from the LGFA has been for longer dated maturities but has recently introduced a short term funding facility, too. Says LGFA’s CEO Mark Butcher, “It is encouraging to see tools like Hedgebook developed for the Local Government borrowing community. With over $5.5 billion currently outstanding to Councils across New Zealand, the LGFA draws confidence that these liabilities can be managed with a degree of sophistication.”
It is important for Hedgebook to cater to the wide and varied funding sources available to the corporate and Local Government sectors, therefore, the HedgebookPro system has been expanded to accommodate the majority of debt instruments available through financial markets to Hedgebook users. In doing so, Hedgebook is further reducing the need for companies/Councils to rely on external spreadsheets for managing treasury matters.
As well as adding a level of general risk management rigour around the capture and reporting of debt, the software’s latest module will provide functionality that cannot be achieved through spreadsheets. For example, automatically rate-setting floating rate instruments against the underlying BKBM reference rate and applying the appropriate credit margins which in turn flows through to the cashflow and interest accrual reports.
Hedgebook will continue to be developed in a practical and useful manner and remain easy to use. Oh, did we mention it’s cheap low cost? Why not get in touch for a demo?
Kathmandu is an iconic New Zealand company, having been established in 1987 and grown to be a global success. Kathmandu is a leading specialist in quality clothing and equipment for travel and adventure in New Zealand, Australia and the United Kingdom. It has more than 160 stores around the world and is listed on both the NZX and the ASX.
With its global reach comes exposure to fluctuations in exchange rates. Kathmandu’s key currency risks lie in the USD, AUD and GBP. Being publicly listed means Kathmandu needs access to accurate information in a timely manner for its financial reporting. Kathmandu also uses Hedgebook for its hedge accounting.
Kathmandu has recently chosen HedgebookPro as the treasury system to manage its foreign exchange hedging and exposures. As Chris Kinraid, Group Financial Controller, noted “Hedgebook’s functionality satisfies our treasury needs and at a compelling price point.”
Hedgebook welcomes Kathmandu as its newest client in 2016.
While I am sure when Coldplay sang “Nobody said it was easy” they weren’t talking about FX hedging (unless they were thinking of repatriating some of their royalties), it doesn’t have to be as uncertain and difficult as many business owners perceive.
Here at Hedgebook our ethos is very much “keep it simple” because often we find importers and exporters are scared to hedge. That’s because they don’t understand the implications of the hedges they are putting in place, whether they are simply using FX forwards or being a bit more edgy and using options, normally zero-cost.
The basics of FX hedging haven’t changed since currencies were first freely floated. At a basic level you need to have visibility over your position. This means:
- forecasting your current and future foreign denominated cashflows
- knowing what FX hedges you have in place versus your foreign cashflows
- overlaying all of this with real time foreign exchange rates.
This is commonly known as the “three pillars of currency risk management”.
By pooling this information together you get total visibility over your position to make informed hedging decisions. What happens if the currency goes up or down two cents? Do I care? Does it affect me achieving my budget rate?
As with anything, the more information, the better the decision. Everyone has a view on where the exchange rate is going but that matters little if you don’t know what the impact on your business is.
Nobody said it was easy but equally there is no reason for A Rush of Blood to the Head (to quote another Coldplay song). Have total visibility over your foreign exchange exposures and start making better decisions.
For a closer look at the building blocks required to simplifying foreign exchange hedging download our Dollars & Sense eBook.