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Identifying Exposure Tenor: Where Does It Begin & End? [VIDEO]

Welcome. Today, we’re going to be talking about identifying the tenor of your exposure. Where does it begin and where does it end?

Identifying the End of an Exposure

The end you would think is relatively easy, but a lot of folks are still missing the end. So when does the exposure end? Some of you like to stop the hedge when the special hedge accounting matures. So when the transaction is recorded or comes onto your financials. For those of you that are doing that, I’m going to just suggest beware because a lot of you are ending the derivative too early.

If you’re hedging transactions that are happening throughout a quarter and you end that derivative at the beginning of the quarter, you’re now exposed between the beginning of the quarter rate and the month in which the actual transaction occurs. And for those of you with hockey stick recording of revenue or costs, the transactions aren’t really being recorded until that month three rate, and you’ve stopped your hedge accounting right there at the beginning of the quarter. So try and get the end lined up with either when you actually are going to record the transaction or a little after that. In my estimation, it’s better to go longer and then use that hedge as a balance sheet hedge when it immediately transitions, or go ahead and hedge all the way through to what your expected, you know, cash flows are on that, either the receipts on the receivable or the payments at the end of the payable.

Identifying the Beginning of an Exposure

So the tricky part is usually where does that exposure begin? And it depends on what we’re hedging.

Hedging the Plan

If we’re trying to protect the plan, then it begins when the planned rate goes in place. So if I have an exposure that begins when the plan rate goes in place, it’d be really inconsistent for me to have a layered hedge program where I’m, you know, I’ve layered out, you know, the first quarter, but have really very little hedge against that fourth quarter. So, you know, figure out when my exposure begins, because when my exposure begins, really should be informing a lot about my hedge decisioning, about when the hedges begin.

Hedging Margin

If I’m hedging margin, it’s going to be critical for me to understand if I have revenue in one currency and costs in another currency. When is the fixing of that revenue price? So, for example, a price list when we issue a price list, when we give on a large project, when we give the first price. I’m kind of setting the stage if we don’t have the ability to kind of retract and change based on rates. It could be as soon as the kind of that first quote, first indication on pricing that we’re giving. If you’re executing a multiyear contract in a foreign currency, two things to watch out for: one, do you have an embedded derivative, two, with that multi-year pricing, you know, you’re exposed for that, those multiple periods and should be considering that in the third year, you’re your exposure began three years ago.

Conclusion

So I think it’s really critical for folks in Treasury to have a really good understanding of how the accounting is flowing and following that with your hedge program. So keep an eye on when does the exposure begin. I’ve got people with three-day exposure, so watch where the exposure actually begins for you and where it ends for you, and make sure your hedges are kind of consistent with that pattern.

Thanks.

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