If the market dropped tomorrow, do you know your exact FX valuations and exposure today? Not just an estimate, an independently calculated position. With Brexit and Covid-19 bringing volatility to the market, UK companies are exposed. This includes needing to make informed decisions around how far a currency needs to move before action is taken. Traditionally this is information many companies only get in a year end audit (or at best) a month end valuation from your counterparty. We say, you can’t afford to wait.
“As responsible FX managers we need to meet market uncertainty with probability; delivering the best, most accurate information we can, so the right decisions can be made. On any day. Not on an ad hoc basis.” Richard Eaddy, CEO Hedgebook
UK FX Valuations Spiking
In April 2020, at the height of market uncertainty to date, we saw a sudden spike in activity from our UK customers. Our clients told us this was due to them needing visibility over FX valuations to make clear-headed decisions. Some needed to know if they could close out for a profit because they desperately need cash. Others wanted to know, if the exposures were no longer there, could they roll the deal out into the future when cashflows would hopefully improve.
We also saw a spike in channel partners completing valuations as they looked to see whether their clients needed to place more collateral due to valuations being negative. They were also running sensitivity reports to see how much more the currency might have to move before clients would need to place more collateral – forewarned is forearmed.
Whatever the reason, it suddenly became important to have an exact, independent, valuation at any time. Previously Hedgebook’s FX audit and sensitivity reporting has largely been used for year-end compliance. But now, because of the volatility of exchange rates and the impacts this brings it is seen as providing a crucial piece of the treasury risk management puzzle.
More UK Companies Hedging
One of the key aspects of managing FX risk is knowing your position. Not only exposures, cashflows and hedges but also, are your hedges ‘in or out’ of the money? In other words, what is the exact valuation, mark-to-market or fair value?
The British Pound was seen as a relatively stable currency over the years until Brexit hit. The increased volatility certainly made UK companies more aware of the risks of not hedging. Then Covid-19 arrived, not only did it accentuate FX market volatility but brought with it unknown economic impacts.
This meant even more UK companies hedging and even more outstanding FX deals requiring to be valued. At the same time, UK accounting standard FRS 102 required all outstanding financial instruments to be valued at year end.
Valuations must be independent
Historically, most companies relied on their counterparty i.e. their bank or broker, to provide this annual valuation. But now there is a requirement to have independent valuations as part of the year end reporting. To be accurate, those auditing the valuations need access to comprehensive financial market data and be able to complete complex mathematical models. If you’re hedging using options, it’s even less straightforward to calculate and none of it can be done on the back of an envelope.
Why does all this matter?
That very same complex reporting you need for an independent year end audit, is exactly what our customers got in April. It wasn’t year end. It was a point in time when they needed an independent view of what their (or their clients) position was – and they could get it. In seconds – literally at the push of a button.
That is why Hedgebook is working closely with some of the largest accounting firms in the UK. In times of uncertainty we all want to be making the best decisions we can and no one can do that without accurate, fact-based data.
This is a discussion none of us want to be having – but if we can predict anything it is that the next few months, if not year, are going to bring enormous uncertainty into the UK market. As responsible FX managers we need to meet that uncertainty with probability; delivering the best, most accurate information we can, so the right decisions can be made. Today. Not at the end of the year.