Découvrez les principales stratégies de couverture des risques de change et les meilleures pratiques de gestion des devises proposées par nos experts en devises.
Priorities for 2025: Invest in better systems to enhance the value of the firm
What is the main role of CFOs and treasurers when it comes to FX risk management? This question is at the heart of our new report Currency Management Priorities for 2025. All too often, the response centres on finding ways to achieve a few additional savings in trading costs. There is nothing intrinsically wrong with this idea.
Corporate treasurers are constantly on the lookout for ways to minimise execution costs in the trade phase of the FX workflow with Transaction Cost Analysis (TCO) and other tools. Yet, this relentless search misses a larger point.
Instead of squeezing an additional pip here and there, FX risk managers should think as business owners as they tackle a key decision: What investments are required to turn currency management into a tool that ultimately enhances the value of the firm?
From this perspective, the next step for CFOs and treasurers is to assess the benefits that technology brings—especially as real-time, API-based platforms supplement the intrinsic limitations of ERP and TMS modules.
Enhancing firm value: better systems to optimise interest rate differentials
Vendors of FX risk management solutions are prone to promote one-size-fits-all static solutions. But most of these systems fail to take into account one of the defining elements in today’s FX landscape: the interest rate differential between currencies.
Consider the one-year forward discount of the Brazilian (BRL) currency to the Swiss franc (CHF). At well above 12% for one-year forwards, this cost may deter Swiss companies from hedging their BRL exposure on the revenue side.
ILLUSTRATION: CHF-BRL EXCHANGE RATE
This is where the need for better systems is felt. By allowing finance teams to delay hedge execution —while keeping the exposure under active management throughout—, real-time, API-based platforms can reduce the unfavourable impact of the BRL discount.
With a few additional bonuses:
- Flexibility. The passing of time gives the treasury team more time to adjust and update its forecasts
- Netting opportunities. Exposure netting opportunities can be uncovered, further reducing costs.
- Collateral management. In some setups, delayed hedge execution optimises collateral management.
- Profiting from favourable market conditions. If FX markets move in a favourable way, better hedge rates can be locked in.
The table below displays some of the possibilities that investment in better systems brings to currency risk managers as they manage forward points:
Favourable forward points
Unfavourable forward points
Pain points
Lost benefit of favourable forward points due to flawed exposure collection
High cost of FX hedging due to the forward discount/premium of currencies used
Strategy
Anticipate hedge execution as much as possible
Delay hedge execution as much as possible
Goals (*)
Profit from interest rate differentials
Reduce the cost of currency hedging
FX automation requirements
Timely and complete collection of exposure data from any company systems, with API-connectivity: ERP, spreadsheets, TMS
24/7 market monitoring automatic calculation of Weighted Average Exposure Rates and conditional FX orders
Example
A EUR-based importer of raw materials from Brazil considers using BRL
A CHF-based company with intercompany loans in MXN delays hedge execution
(*) Assuming that managers’ primary goal is to remove currency risk
Enhancing firm value: better systems to bypass supplier FX markups
For treasury managers, the temptation of buying in one’s own currency can be misleading. The underlying FX risk never goes away—it is merely transferred onto suppliers, who then apply markups to protect themselves from the underlying risk.
By removing this friction, markups are sidestepped and contracting costs are reduced. Profit margins are immediately enhanced—a potentially huge differentiator in low net margin industries like airlines (2.21%), autoparts (2.27%) and food wholesalers (1.34%).
The flip side: finance teams must take ‘ownership’ of the underlying FX risk. For firms that update prices frequently while conducting a large number of transactions in many currencies, this means one thing—invest in systems with market-based microhedging capabilities.
Buying in suppliers’ currencies
Calculations
Europe-based bed bank’s selling price in euros
€100
Spot EUR-USD
0.9700
Price per room; supplier A quotes in $, supplier B in € (translated at spot)
$92
Contracting costs with supplier A (in USD)
€94.85 = $92 / 0.97
Contracting costs with supplier B (in EUR with 1% markup)
€95.83 = $92 / (0.97 - 1%)
Gross profit margin with A (*)
5.2% = (100 - 94.85) / 100
Gross profit margin with B
4.2% = (100 - 95.83) / 100
(*) Note that the margin increases to 5.5% by using the forward rate of 0.9730 instead. Forward points are favourable because —as interbank interest rates are higher in the U.S. than in Europe— the exchange rate translates into a higher forward EUR value, compared to spot. This gain can be used to reduce contracting costs.
Enhancing firm value: better systems to hedge cash flows
At large and complex businesses, finance teams oftentimes lose sight of some of their most pressing FX-related challenges. Satisfied with the goal of taming earnings variability, they may opt to limit their currency risk management to the act of removing the accounting impact of FX gains and losses.
But the lack of cash flow hedging may indicate that the underlying economic risk is not properly managed—a potentially troubling situation in times of heightened geopolitical risk and Trade Policy Uncertainty.
While the rationale for such programs is well understood, their performance —in terms of cost, risk and growth— has been rendered much more effective in recent years and months. This is because new systems make it possible to set complex combinations of cash flow FX hedging programs, as shown in the table below:
Micro-hedging
Static hedging
Layered hedging
Pricing
Frequently updated
Catalogue-based
Steady across periods
Type of exposure
Firm sales and/or purchase orders
Forecast for single periods + firm orders
Rolling forecast + firm orders
Managers’ principal objective
Protect profit margins in all transactions
Protect the budgeted profit margin
Achieve a ‘smooth’ hedge rate
Secondary objectives
Optimise forward points and exposure netting
Avoid over-hedging and optimise forward points
Optimise forward points
Role of micro-hedging
Standalone program
In combination with static programs
In combination with layered programs
The critical investment decision: better systems to manage FX
This article presents three examples of how real-time API connectivity improves treasury teams’ systems and leads to enhanced firm valuation. More cases can be brought forward to illustrate the point, especially in pricing, swap automation, centralisation and reporting.
In a year that is bound to provide many FX market-moving announcements and counter announcements from the US president and others, properly managing currency risk will be rightly seen as a strategic priority for businesses all around the world.
The next time you think of ways to try and squeeze an additional basis point in trading costs, make sure that this (legitimate) concern does not distract you from the key financial decision: invest in better systems to enhance the value of the firm.
