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Gathering Your Global FX Exposures

There are many factors to consider and actions to take when starting a foreign currency hedge program. One piece that is often overlooked — and can create significant downstream benefits and efficiencies — is consolidating your global exposures.

By combining exposures from multiple entities into a single number, corporations doing business internationally can save costs, save effort, minimize noise and gain a true understanding of their exposures to movement in FX.

Think of it as taking a holistic approach to your exposures. What is your global exposure to each currency? These can be found by dissecting entity balance sheets, understanding global revenue and cost streams and evaluating the nature of your net investments? It all factors in.

For a simple example, imagine a corporation with both third party purchases from Germany and a sales subsidiary in France. Both may have EUR/USD exposure, one needs to sell Dollars and buy Euro associated with the third party purchases, and the second may need to buy Dollars and sell Euro purchase product from the parent. Thus, the exposure would naturally offset; there is no need to hedge both. Only one transaction is needed: a hedge on the holistic risk– the sum total of the entire corporation’s EUR exposure. The netting should also include netting cross currency exposures to simplify hedging.

We consider exposure gathering and netting to be one of the first — if not the first — actions to be taken when implementing an FX hedge program. It takes a bit of digging and a bit of math, but the benefits are myriad:

  • Hedging the EUR at parent and sub, for example, requires only a single transaction, rather than a transaction for each entity with exposure to the currency. This means fewer contracts, which means smaller transaction costs and reduced efforts.
  • You take advantage of natural hedging, which essentially serves as a “free” risk mitigation factor.
  • Finally, by the very nature of gathering your exposures, you increase visibility into your overseas business, potentially uncovering additional currency risks.

Starting an FX hedge program, or just considering doing so? Need a hand? Hedge Trackers experts have been implementing foreign currency hedging programs for corporations since 2000. Click here to contact us today, or call 408-350-8580.