00:00:00:28 - 00:00:36:12
Speaker 1
Should CFOs hedge cashflows or balance sheet items? Welcome to CurrencyCast CFO Edition. My name is Agustin Mackinlay. I'm the financial writer at Kantox and your host. In the current set of episodes, we're focusing on currency management from the lens of the Chief Financial Officer. In this week's episode, we're going to bring an important new element to the age-old debate about whether CFOs should concentrate on cash flow or balance sheet hedging.
00:00:36:12 - 00:01:00:22
Speaker 1
The debate about whether hedging cash flows or net income by removing the impact of foreign exchange gains and losses is as old as currency hedging itself. It will never be entirely settled, yet, CFOs have a key role to play in making sure that enough clarity exists so that the dangers of ad hoc or unsystematic hedging are avoided. We're happy to report
00:01:00:22 - 00:01:31:11
Speaker 1
excellent news: technology now makes it possible for risk managers to perform both cash flow and balance sheet hedging. Not only that, the process of compiling the required information or documentation to perform hedge accounting can be easily automated. The paradox of accounting measures of performance is that while they attract massive amounts of attention from a variety of stakeholders, they are often calculated with arbitrary criteria.
00:01:32:03 - 00:02:01:02
Speaker 1
Net income, for example, is plagued by subjective judgments regarding depreciation and other items. Yet the mystique of reducing net income variability as a goal of FX hedging is as powerful as ever. It is often seen as a way to provide more informative financial statements. If disciplined CFOs are in control, so the argument goes, then that must be good news regarding firm valuation.
00:02:02:27 - 00:02:27:15
Speaker 1
While a certain amount of soul searching is unavoidable when it comes to setting the goals of your FX hedging strategy, a number of practical steps can be outlined. These steps reflect a concern with keeping the ability of the firm to generate long-term cash flows by giving special importance to the pricing characteristics of the business. These steps include: 1. Avoid adhoc or unsystematic hedging.
00:02:27:33 - 00:02:52:29
Speaker 1
This is a road to nowhere, and it always should be avoided. 2. Define the goals of your FX hedging strategy, such as protecting the campaign or budget period, smoothing the FX rate over time, hedging transaction exposure or removing the impact of foreign exchange gains and losses. 3. Based on those goals, they find the best FX hedging program while imagining that infinite resources can be deployed.
00:02:53:36 - 00:03:30:18
Speaker 1
4.Consider then using currency management automation to seamlessly run all the phases of the FX workflow: the pre-trade phase, the trade phase and the post-trade phase. 5. Only then prune the strategy by adjusting it to the available resources while measuring the impact of that adjustment in terms of growth, risk and costs. 6. Finally, use technology to complement your cash flow hedging programs with balance sheet hedging programs and/ or to automate the process of compiling the required documentation for hedge accounting.
00:03:30:42 - 00:03:49:46
Speaker 1
In other words, do away with imaginary or outdated constraints. Give priority to your FX goals, not to the resources currently at hand. Thanks for tuning in. If you enjoyed this video, make sure to like, share or subscribe to our channel in order to keep up to date with upcoming episodes.
