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The dangers of key person risk in currency management

Discover essential FX hedging strategies and currency management best practices from our foreign exchange experts.

The dangers of key person risk in currency management

9 March 2023
3 min read
Agustin Mackinlay

Free yourself from monster spreadsheets that haunt your dreams. Learn why key person risk in currency management is holding you back from achieving your FX goals and how you can eliminate it.Are you relying on a single person to manage your company's currency with gigantic spreadsheets, that include sensitive information and could break at any time? If so, you may be running a massive amount of key person risk. In this article, we discuss what companies can do to remove key person risk as they manage currencies.If you want to have a quick overview of key person risk, watch now our episode of CurrencyCast and discover why key person risk is holding you back from your FX goals.

Understanding key person risk

Key person risk is generated when a single individual is responsible for a high degree of overall business performance. This reliance exposes the firm to financial loss in the event of holidays, sickness, or any other reasons for absence. While regularly discussed in the context of foreign exchange risk management, key person risk is one of the most difficult risks to manage.That is why you should be aware of where it is originating and how it could be affecting your performance. Start by assessing your currency management processes. This will allow you to pinpoint the exact tasks that are lacking support.

Assessing your firm's currency management

To understand the nature of key person risk, we may start by mentioning two complementary ways of assessing a firm's currency management. The first is the FX program effectiveness itself. The second is the degree of FX workflow automation.The first dimension is among the firm's primary and secondary objectives, such as achieving a smooth hedge rate over time or optimising forward points. The second is about the processes that must be in place to achieve those objectives systematically. And here's where key person risk kicks in.It is important that you understand what dangers lie behind key person risk. It all starts with approaching currency management the traditional way. And overlooking the technology and automation tools that optimise how you manage foreign currencies. Let's take a look.

The dangers of manual processes

Many companies use manual, and time-based processes to run the FX workflow. So management decides that certain tasks need to be executed at certain dates, like once a week or once a month.Quite apart from the fact that such time-based processes may be completely irrelevant from an economic point of view, they heighten the key person risk.

Beware of the monster spreadsheets

Another critical component of key person risk is spreadsheet risk. Which go hand in hand, and can cause serious damage to your margins. Some companies rely on monster spreadsheets filled with critically important information, such as forecasted cashflow exposures and the schedule for hedge execution in different currency pairs.These spreadsheets often contain macros and other features that only a single individual knows how to run. This is very dangerous for those treasury teams where this person finds themselves in a tricky situation where they can't go on holidays or sick leave. There would be no one to fill in for them so they are stressed about leaving the company high and dry.And on top of this, you have to add the risk of manual data input errors, copy and paste errors, formatting, and formula errors. Which is very common within spreadsheet risk.

Solving the key person risk problem

How can companies solve this problem? By implementing a properly automated currency management program that relies on business rules to strengthen control. Depending on the type of program, such business rules include dynamic stop-loss and take-profit orders, the percentage of exposure under active management, the length of the program, and so on.Written procedures ensure that business rules are properly documented. With API connectivity taming spreadsheet risk, managers can achieve a remarkable feat. Not only do they strengthen the Treasury's strategic position, but they also remove key person risk.Key person risk can be a dangerous situation for any company. However, by shifting the focus from key individuals to strategic functions, companies can remove this risk altogether. At Kantox, we offer a highly effective currency management program and workflow automation to help remove key person risk and provide better control over your company's currency management.

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Agustin Mackinlay
Agustin Mackinlay is a Financial Writer at Kantox. He has previously worked at an investment bank specialising in Emerging Markets. Agustin teaches several courses in Finance at LaSalle University and EAE Business School in Barcelona. He holds degrees from the University of Amsterdam and from the Kiel Institute of World Economics in Germany.
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