No More Excuses! It’s Time to Implement the Right Hedging Program
1 December 2020 · 3 min read
More than half the participants of the Kantox & TMI FX Survey describe their existing currency hedging program as inadequate. And that’s not all: 72% of participants admit the need for updates and changes to their policies and programs going forward.
How do we account for this widespread inadequacy? The answer is simple. Most managers start by assessing the available Treasury resources. Only then do they set up the firm’s hedging programs.
This is the wrong approach.
Instead, managers should start by assessing the FX needs of the business, paying special attention to the firm’s pricing parameters. Only then should they design the hedging program.
Over-hedging —the situation of a firm that has hedged in anticipation of an exposure that has failed to materialise— is a perfect example of the challenges posed by a program designed with the available technology. As the Kantox & TMI Survey shows, it is one of the most pressing concerns for treasurers.
The problem of over-hedging is often associated with a ‘lack of visibility’ in treasurers’ forecasts. The apparent solution then is to ask for more staff to be hired at the Treasury team.
At Kantox we disagree with this diagnosis.
More often than not, over-hedging is the byproduct of a hedging program that was badly designed from the start—and where the wrong tools were applied. Spreadsheets, TMSs or ERPs, were never designed with FX management needs in mind.
That’s why it is becoming more and more important to use technology that is flexible enough to allow managers to deploy FX programs that are tailored to the specific needs of the business.
Starting off on the right foot
Take the case of a company that does not update its prices frequently, yet has an FX-sensitive business model, favourable forward points, and a low degree of forecast accuracy. It would be hazardous for such a firm to rely on a traditional ‘static program’ where the whole budget is hedged at the start of the period.
Instead, the magnitude of an early static hedge should be kept within the bounds of what is nearly 100% certain in terms of accuracy. For the rest of the budget, a more dynamic combined program —based on firm commitments— can be designed.
Such hedging programs and combinations of programs can be tailored to fit any business model and pricing parameters. By applying these programs, companies make sure that situations of under or over-hedging are avoided, and that a hedge rate that is equal or better than their budget/campaign rate is systematically achieved.
But this requires technology.
A game-changer: Streamlining the end-to-end FX processes
There is a way out of the costs created by inadequate hedging programs. As Antonio Rami, Kantox’s co-founder and Chief Growth Officer put it during a recent Kantox webinar: “By using technology to streamline the end-to-end process of FX risk management —from the pre-trade phase down to the accounting tasks— companies can sidestep the pitfalls of softwareless currency management”.
Armed with a thorough understanding of the FX needs and pricing dynamics of their business, companies can deploy the Currency Management Automation solutions needed to create —and to execute— the hedging program that best suits the business.
It’s high time to ditch excuses like the ‘lack of visibility’, ‘high FX volatility’ and ‘insufficient treasury resources’.
Start off on the right foot instead. Look at the needs of the business first, and then go for the hedging program that allows your firm to take advantage of emerging growth opportunities—just about anywhere in the world.
See our previous blog posts related to the 2020 Kantox & TMI FX Survey: “The Absurd Cost of Softwareless FX Management” and “Tear Down those Silo Walls!”. In the next edition of our blog series, we will explore how the lack of technology and internal resistance to change are the main obstacles for reaching treasury goals.