00:00:00:13 - 00:00:24:31
Speaker 1
Are you confused about how to manage currency risk in a volatile scenario? Stay relaxed. Welcome to Currency Cast Experts Edition with a focus on foreign exchange hedging strategies. My name is Agustin Mackinlay and I am the senior financial writer, and today we have a special guest in Eloisa Oliva, Country Manager for Italy at Kantox. Welcome to Currency Cast, Eloisa.
00:00:25:01 - 00:00:26:14
Speaker 2
Thanks for the invitation Mack.
00:00:26:38 - 00:00:43:02
Speaker 1
Eloisa will explain how CFOs and traders need to manage currency risk in a global economic and financial scenario. Where big swings in exchange rates and limited cash flow visibility appear to be the norm.
00:00:48:48 - 00:00:58:44
Speaker 1
We're living through episodes of sharp effect volatility. The U.S. dollar has been very strong, so just look like a cliff. What can companies in Europe do about it?
00:00:59:38 - 00:01:33:04
Speaker 2
It depends on the business model. If yours is a dynamic pricing industry, then all you need to do is have a mechanism in place which allows your pricing to be correctly updated accordingly to the new rates and you will be, let's say, relatively concerned. If, on the other hand, you work in a sector with more stable prices, then the FX strategy to implement can be that of layered hedging, which allows you to make conversions and payments every month at a stable price
00:01:33:25 - 00:01:37:05
Speaker 2
regardless, of the movements, even significant, of the currency market.
00:01:37:38 - 00:01:38:42
Speaker 1
Could you give us an example?
00:01:39:36 - 00:02:15:07
Speaker 2
Sure. There are companies in the publishing in the fashion or in the food sectors that implement the layered hedging to stabilise the rate at which they make payments in US dollars every month. Kantox is able to read both the forecast and the real FX exposure of their purchase orders and invoices to execute the hedges that perfectly respect the hedge ratios defined by the policy that geometrically result into a stable rate period over period.
00:02:16:22 - 00:02:32:02
Speaker 1
That's really interesting given the current FX volatility. Let me get a little bit deeper into that and a layered hedging program like this surely requires some level of automation because you need to educate an entire schedule of timely hedges with a high risk of human error. Is that right?
00:02:32:30 - 00:03:13:34
Speaker 2
Indeed, it is very difficult to perfectly implement the layered hedging manually because of the high workload in the pre trade, in the trade, and also in the post-trade phase. But let me give the audience also another example of successful automation in currency management. It is regarding another type of hedging program, a micro hedging from firm commitments, sales orders in this case, and the company is Dulevo, a large Italian manufacturer with operations in 80 countries and many sales in US dollars like these just to highlight that automation is tailored and can be different for different companies and business models.
00:03:13:34 - 00:03:22:37
Speaker 1
Now correct me if I'm wrong, but here one of the main challenges is to capture the exposure information in a timely manner, which requires a connection to Dulevo’s ERP.
00:03:24:03 - 00:03:52:34
Speaker 2
Correct, automating the pre-trade part of the workflow was one of the main challenges. But now we are also very happy with the results. To give you some numbers, Dulevo has achieved €250K in reduced risk deviation, €50K yes in transaction savings, as well as cutting by 3 hours a week the time devoted to FX risk management.
00:03:52:34 - 00:04:09:36
Speaker 2
And Andrea Dioni, Dulevo’s CFO, says he’s glad to have FX completely under control while also having more time to devote to other strategic activities.
00:04:09:36 - 00:04:35:18
Speaker 1
We seem to be living in a world where new shocks happen all the time. Pandemic, inflation, the war in Ukraine, the flash crash in the British pound. The way I see it, this creates three interconnected challenges: FX volatility, shifting interest rate differentials, and less-than-stellar cash flow visibility. Eloisa, what can CFOs and Treasurers do about this?
00:04:36:07 - 00:04:40:31
Speaker 2
So the first thing to do is don't panic. Solutions are there.
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Speaker 1
Well I feel relieved already. Tell us more about these solutions.
00:04:44:42 - 00:05:12:24
Speaker 2
So let's go through these concerns one by one. First and foremost, FX volatility. There is an entire set of automated hedging programs and combinations of hedging programs which allow CFOs and Treasurers to remove currency risk with a great level of precision. Let's take the cash flow hedging program. The program you need essentially depends on the pricing parameters of your business.
00:05:12:48 - 00:05:36:28
Speaker 2
Do you face dynamic prices? Do you keep fixed prices for an entire campaign period and then reprice at the start of the new campaign? Or do you want, do you need to keep prices stable as possible not only for one campaign per year, but for a set of campaigns or years linked together? Well, from this the strategy is going to be built.
00:05:37:08 - 00:05:40:37
Speaker 1
Now, each of these programs present its own set of challenges. Right?
00:05:41:23 - 00:06:18:31
Speaker 2
This is where technology plays a major role. So simple API calls make exposure data flow seamlessly between different systems, ERP, TMS, and others. And once you have set the configuration of your hedging program, the software solution is able to capture the different types of exposure while keeping monitored the currency market. This way you achieve the protection, for example, of your budget rate or you reach any of your FX policy goals.
00:06:19:07 - 00:06:31:05
Speaker 2
In most cases, the number of the currency pairs or the transactions, as well as the target rate that you want to achieve, make it impossible to manually perform these programs.
00:06:31:05 - 00:06:48:45
Speaker 1
And what about shifting interest rate differentials, now that central banks are changing interest rates each at its own pace? And what can you do about the problem of less-than-stellar cash flow visibility?
00:06:49:47 - 00:07:16:17
Speaker 2
These questions are related. Let me explain. If you are an Italian exporter and you sell, let's say, in emerging market currencies or also in US dollars or GBP, interest rate differentials are not in your favour. With the automation, you can configure a hedging program that allows you to delay the execution of the hedges while still keeping completely under control the FX risk.
00:07:16:37 - 00:07:23:15
Speaker 2
That way, you reduce the cost of hedging that comes from the adverse interest rate differentials.
00:07:23:15 - 00:07:27:34
Speaker 1
But what does that have to do with a problem of forecasting accuracy?
00:07:28:22 - 00:08:00:01
Speaker 2
And they are related. That's precisely the point. By delaying execution of the hedges, you gain more time to update your cash flow forecast. And you can also leverage the information that comes from firm orders and invoices to continuously improve your forecast with two additional bonuses. First, you don't need to set immediately aside the cash required for collateral. Which is good news, especially if interest rates are on the rise, like they are in Italy right now.
00:08:00:25 - 00:08:17:03
Speaker 2
And second, you have more opportunities for netting and for saving in trading costs. So as you can see, all the challenges are really tackled with the help of a single software solution.
00:08:17:03 - 00:08:40:47
Speaker 1
I admit I feel a sense of relief. Whatever happens in currency markets, whatever central banks do about inflation, whatever your degree of forecast accuracy, you have the tools as a CFO or a Treasurer to tackle the currency related challenges of the volatile world we are in. Are you worried about your currency management strategy in these highly volatile and unpredictable times?
00:08:41:21 - 00:08:48:10
Speaker 1
Get in touch with our specialists for a free session. Eloisa Oliva, thanks very much for sharing this episode of Currency Cast.
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Speaker 2
Arrivederci!
