00:00:00:10 - 00:00:25:01
Speaker 1
Welcome to CurrencyCast CFO Edition. My name is Agustin Mackinlay. I'm the financial writer at Kantox and your host. Over the next four episodes, we're going to discuss currency management from the lens of the chief financial officer. We'll break down how FX management affects the entire business and demonstrate how CFO can use currencies to surpass their own KPIs and stay ahead of the competition.
00:00:25:47 - 00:00:36:07
Speaker 1
In this week's episode, we focus on the benefits of currency management and FX hedging, in particular, and why they are so important today.
00:00:41:38 - 00:01:10:26
Speaker 1
The first benefit of currency management and FX hedging, in particular, is it allows CFOs to confidently embrace the profit-margin-boosting benefits of embracing currencies. That is to say, sell in the currencies of your customers, and buy the currencies of your suppliers, with no FX risk. Selling in the currencies of your customers allows you to pocket some of those pricing markups that would otherwise be applied by customers as they seek to manage their own FX
00:01:10:26 - 00:01:39:22
Speaker 1
risk. Buying in the currencies of your suppliers brings three immediate benefits: One, it allows you to avoid inflated prices charged by suppliers as they apply pricing markups in order to defend themselves from currency risk. Number two, you are in a position to widen the range of potential suppliers and put more of them in competition. And number three, you would get extended paying terms.
00:01:40:31 - 00:02:11:41
Speaker 1
The second benefit of currency hedging is that it allows CFOs to provide more informative financial statements. Informative financial statements allow investors to assess the quality of management as they remove unnecessary noise created by those accounting, foreign exchange gains and losses. To the extent that net income variability is seen as a sign of the quality of management, Effective currency hedging creates a sense of discipline in the eyes of investors.
00:02:12:42 - 00:02:48:49
Speaker 1
Currency management automation brings two additional elements when it comes to the accounting-related aspects of currency management. Number one, you can implement a micro-hedging program for balance sheet items, allowing you to hedge with great precision all of those invoices and thereby remove the impact of foreign exchange gains and losses on your financial statements. Number two, thanks to the traceability inherent in those systems, your accounting team is in a position to easily automate all the processes and the documentation required for hedge accounting.
00:02:51:43 - 00:03:15:46
Speaker 1
The third advantage of currency hedging is that it allows CFOs to reduce cash flow variability. Reducing cash flow variability makes it possible for businesses to execute their business plans and to meet all cash payments. This might be especially important when access to external findings at a reasonable cost is scarce, and that tends to happen, of course, in times of pandemics and wars.
00:03:16:46 - 00:03:44:21
Speaker 1
Here I have in mind, among all the cash flow hedging programs, layered hedging programs that allow CFOs to keep steady prices in the face of adverse moves in currency markets without hurting your budgeted profit margins. The fourth benefit of currency hedging is that it allows you to optimise taxation to the extent that higher levels of net income are taxed at a higher rate,
00:03:44:47 - 00:04:20:16
Speaker 1
smoothing out earnings over time allows you to optimise taxation. And then there's the fifth benefit of currency management and currency hedging. It has to do with the better use of your invested capital. I'm thinking, in particular, of pricing with a forward rate in the event of favourable forward points. That is if you're selling in a currency that trades at a forward premium, pricing with a forward rate allows you to create and stimulate demand for your products while keeping your budgeted profit margins completely under control.
00:04:21:12 - 00:05:06:33
Speaker 1
Now, in the event of unfavourable forward points –that is, if you're selling in a currency that trades at a forward discount– pricing with a forward rate will protect you from currency risk and allow you to remove excessive pricing markups that might hurt your competitive position. Up until now, the benefits of currency management and FX hedging, namely confidently embracing currencies, providing more informative financial statements, reducing cash flow variability, optimising taxation, and making better use of invested capital, are overshadowed by the perception of currency management as a costly, time-consuming and resource-intensive activity.
00:05:08:05 - 00:05:31:25
Speaker 1
Now, digital solutions and API-based technology are putting that notion to rest. Moreover, multi-dealer trading platforms are sharply reducing the cost of hedging for companies. So the good news is that CFOs have at their disposal a set of cost-effective tools that will allow them to take their business to the next level.
