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Foreign Exchange Resolutions in 2015: Three Things Corporations Need to Do to Minimize Risk

We’re only a few weeks into 2015, and it’s already been an eventful year in the world of foreign currency.

Volatility has been the rule, with the ruble in a free fall, the Swiss central bank abandoning the franc’s exchange rate peg to the euro, and the steep appreciation of the USD against almost every currency.

Such market volatility means one thing: It’s time for corporations to take a hard look at what can be done to manage their FX exposure. While the exact steps to be taken vary widely on a company-by-company basis, the following three recommendations should be taken universally.

1. Take a Proactive Approach

No matter how good your analysts and data, it’s impossible to know exactly what the FX market will throw at you in the future. A few weeks ago, for instance, nobody would have seen Switzerland’s move coming – and that’s only one example. Foreign currency is unpredictable, and it will always be that way.

That doesn’t mean your corporation should be subject to whiplash that mirror the market. By taking a proactive approach to FX – setting up a best practices hedge program, investing in proper technology and tapping experts for counsel – you can reduce your FX exposure, no matter what tomorrow brings.

If you’re already hedging foreign currency – and there’s good reason to believe that many readers are – this should serve as a reminder to examine your program’s past performance, identify the holes and refine your 2015 strategy. Things change; that’s the nature of FX. But with regular attention and a proactive approach, it’s possible to insulate yourself from the kinds of ups and downs that this year has already brought.

2. Create Harmony Between Treasury and Accounting

To effectively mitigate FX risk, Treasury and Accounting must work together seamlessly – and it must be made as simple as possible for them to do so. Too many technology solutions focus only on the trade execution needs of Treasury while essentially ignoring accounting, or vice versa. In today’s corporate world, where efficiency, integration and communication are absolutely essential, that’s simply not good enough.

If your corporation has yet to codify an FX hedging strategy or you’re still running a hedge program using spreadsheets or an inadequate all-in-one software package you should investigate a software solution designed to simplify and automate FX hedge program management for both Treasury and Accounting that:

  • Creates streamlined information flows between Treasury, Accounting, SEC reporting, field operations, etc.
  • Handles all derivative accounting scenarios within the software (dedesignations, amortization of gains/losses to income, back-to-back trading, etc.)
  • Eliminates the need for derivative-related related spreadsheets in any department
  • Serves as a “single source of truth” for hedge program data
  • Allows for quick, easy performance reporting, supported by a high level of detail

Simply put, the more intradepartmental functionality provided by a hedge program management solution, the more efficiencies it will create when it comes to the interplay between Treasury and Accounting.

3. Consult with an Expert

Mitigating currency risk isn’t something that can wait until next month or next quarter; if you’re not taking action, it’s a clear and present danger. To understand your risks and opportunities to address them you will need an expert that understands the debits and credits related to currency transactions and consolidation as well as those required for derivative accounting. Experts can help avoid the too common pitfalls that frequently sideline poorly executed corporate hedge programs.

Fortunately, it’s possible to address your issues both safely and quickly. Hedge Trackers, for instance, has a proven history of getting corporations’ hedge programs up and running effectively in a matter of weeks. It all comes down to experience, scalable systems and domain expertise; to meet today’s FX hedging best practices in a timely manner, you need all three.

Conclusion

Due to a number of factors, the FX market is in a state of upheaval in the early days of 2015. For many corporations, a constant stream of currency-related news has served as a wake-up call that now is the time to seriously examine their exposure to FX risk. By taking a proactive approach, coordinating the efforts and interactions of Treasury and Accounting organizations and tapping the right third-party resources, that goal can be accomplished quickly, efficiently and effectively.

Want to learn more? Contact Hedge Trackers today. Our FX hedging experts would be happy to help.