foreign exchange exposure management - treasury & risk...foreign exchange exposure management: a...

Foreign Exchange Exposure Management:A benchmark survey of foreign currency exposure

and risk practices, challenges, and results

®

www.fireapps.com1 Phone: +1.866.928.3473


Table of Contents3 J Introduction

3 J Key Findings

4 J Study Landscape

5 J FX Gain/Loss Results and Indicators

7 J FX Exposure Management Practices

10 J Key Challenges to Managing FX Risk

11 J Conclusion

12 J Next Steps

12 J About FiREapps

12 J About SunGard

Introduction In today’s volatile global economy, amidst swift and sudden shifts in currency trends, corporations worldwide

increasingly regard foreign exchange (FX) exposure management as a critical component of their overall

strategy to cut costs, manage risk and maximize corporate value. One of the fundamental challenges

companies face as they seek to optimize their management FX exposure management results is a lack of

standard processes, uniform policies or other benchmarks to define a successful program.

In response, the following global study was conducted to benchmark foreign exchange exposure

management practices and FX risk management results. The study is based on responses from 275

participants across 16 primary industries, and more than 17 regional classifications; grouped as 66%

Americas, 24% Europe/Middle East/Africa and 10% Asia Pacific.

The purpose of this study is to allow organizations to benchmark themselves against their peer groups

and explore how these organizations are managing FX risk today, evaluating methodology around

frequency, source of data, and types of calculations utilized. As such, the data is often segmented looking

at organizations by revenue size and by business scope such as number of currencies. The majority of

survey questions focused on FX impacts to the balance sheet; future studies will focus on revenue and

expense impacts.

Key FindingsThe study reveals that material FX gains/losses over the last 12 months were the rule, rather than the

exception, where material impacts were defined as +/- 5% of net income. Across a broad range of industries,

revenue categories, and regions, FX gains or losses had a material impact in 59% of the organizations

responding to the study. This contrasts with results of a similar study conducted in 2008, where just 40% of

companies reported a material FX gain/loss (a 45% increase). A majority of respondents (45%) monitored

FX exposures only on a monthly basis, with 31% conducting more frequent exposure monitoring. With a

majority of respondents citing challenges with data integrity and exposure calculation, this suggests that,

lacking transparency to account-level details, frequency cannot overcome more fundamental issues.

The key challenge identified by executives and FX practitioners as part of this survey highlight one of

the principle causes of unanticipated FX results: a fundamental lack of confidence in the integrity of FX

data and the timeliness and validity of resulting FX exposure calculations. The top three FX management

challenges, as ranked by survey respondents (on a scale of 1-6, with 1 being most challenging), related to

the difficulty in quantifying exposure at 2.58, confidence in data was rated 2.93 and timely access to data

received a 3.03.


The study heightens awareness around the limitations that unreliable data and inefficient exposure

management processes can place upon even the most sophisticated organizations (regardless of policy,

frequency of analysis, company size, industry or geographic distribution of business, the top issues are

centered around the inability to get to accurate data for the analysis.

Study Landscape A global study around FX management was conducted during the first quarter of 2010. The study reviewed

practices of 275 finance executives and practitioners across a diverse set of industries. A majority of

responses were derived from the industrial manufacturing sector (22%), with more than 16 sectors

represented in total.

The companies surveyed ranged from smaller corporations (under $500M USD in revenue) to those

generating more than $10B in annual revenue, with the majority falling between $1B and $3B. As the survey

results demonstrate, no strong correlation was witnessed between the size of an organization and its FX

practices or results.

The study heightens awareness around the limitations that unreliable data and inefficient exposure

management processes can place upon even the most sophisticated organizations (regardless of policy,

frequency of analysis, company size, industry or geographic distribution of business, the top issues are

centered around the inability to get to accurate data for the analysis.



FX Gain/Loss Results and Indicators In an environment where long-term global currency volatility is on the rise, one key metric for companies

managing their foreign exchange exposure is whether or not they experienced a material FX gain/loss.

A majority of survey respondents (59%) reported that they had experienced a material FX loss or gain in

the past 12 months. This contrasts with results of a similar study conducted in 2008, where just 40% of

companies reported a material FX gain/loss (a 45% increase).

A majority of survey respondents (59%) reported that they had experienced a material FX loss or gain in

the past 12 months. This contrasts with results of a similar study conducted in 2008, where just 40% of

companies reported a material FX gain/loss (a 45% increase).

With many variables influencing the inability of companies to manage FX results according to expectations,

neither the annual revenue (domestic and international), nor the percent of business conducted

internationally was a clear indicator of how the company would perform with respect to FX management.

For companies wishing to benchmark their own potential FX risks, these results suggest that regardless of

company size or international revenues, there remains a high degree of susceptibility to a material FX impact.

Taking into account additional FX impacts to corporations that were economically significant but technically

immaterial (i.e. +/- 4.9% or less of net income), foreign currency volatility clearly presented a substantial

economic risk over the last 12 months.

Looking at FX gain/loss results by the percent of international revenues produced similar mixed results.

A slim majority of companies at both extremes (those with less than 10% of revenues coming from

international business and those with international revenues greater than 90%) avoided material FX gains/


losses. The majority of companies in the middle (11-89% international revenues), however, reported material

FX gain/loss results over the last 12 months. Discounting the outliers at either extreme, 64% of companies

with international revenues between 11-89% of total revenue experienced material FX gains/losses.

After evaluating business profile criteria such as industry, company size, or percent of business conducted

internationally, the study then took a look at the underlying methodologies being used to evaluate FX

risk. While profile criteria did not uncover any correlations to material impact, there were some linkages

uncovered when evaluating methodology. These are discussed in the next chapter.

FX Exposure Management Practices With a lack of established standards and best practices, companies have employed a wide variety of

approaches to calculating and monitoring FX exposures mitigating of FX risk. The following section

highlights the various policies and methods that companies rely on today. The survey results demonstrated

no strong correlation between specific practices and FX gain/loss results, suggesting that the underlying

challenges of achieving accurate and timely FX data is fundamental to successful FX risk management.


How Often Do You Monitor Exposures?

A majority of respondents (45%) monitored FX exposures only on a monthly basis, with 31% conducting

more frequent exposure monitoring. With a majority of respondents citing challenges with data integrity and

exposure calculation, this suggests that, lacking transparency to account-level details, frequency cannot

overcome more fundamental issues.Do You Have a Formal FX Policy?

Do You Have a Formal FX Policy?

65% of the respondents report having a formal FX Policy. What is perhaps notable is that there is not a

significant difference between the policy categories when it comes to whether or not a company is more

susceptible to a material loss or gain. In fact, those companies with no policy at all registered just slightly

higher than those companies with a formal or informal policy.

Hedging

Of the respondents, 71% state that they hedge 80% or less of their exposure, while 34% report that they

hedge less than half. Sub-optimized hedging can often be a sign of a lack of confidence in FX exposure

calculation. Companies occasionally make a conscious decision to under-hedge; essentially “hedge their

hedges” to prevent over-hedging an exposure whose magnitude they have over-estimated. Of course, “de

facto” under-hedging often occurs because the company has under-estimated its exposure.

The majority of respondents choose to hedge base on a specified unit amount of their entire exposure,

versus using a specified percentage of the total exposure, or a specified number of currencies reflecting the

“Top X” exposures. Anecdotal evidence (based in experience not formally captured by this survey), suggests


that companies may be able to their increase hedge efficiency by expanding the currencies they monitor,

while taking into account the volatility of each currency (in addition to the magnitude of the exposure), as

they make hedging decisions.

Trade Methods

A majority (53%) of respondents use a Trading Desk vs. a Portal (just 20%) to execute trades, reflecting the

automated nature of the foreign exchange exposure management process as a whole.


Key Challenges to Managing FX Risk As the study findings illustrate, a majority of companies across a broad range of industries, total revenues

and international revenues experienced material FX gain/loss results over the last 12 months. With no clear

trend emerging in terms of the business profile of these companies as they relate to FX results, the top FX

management challenges cited by survey respondents spoke to the heart of the issue.

As the results below illustrate, the top three FX management challenges, as ranked by survey respondents

(on a scale of 1-6, with 1 being most challenging), related to the challenges of access to data and confidence

in data, followed by timely access to data. Respondents identified “Difficult to Quantify Exposure” as their top

concern, followed by low confidence in FX exposure calculations, and timely access to data as their number

three concern. All three concerns are interrelated and point to an overwhelming challenge around gaining

access to accurate data in a timely fashion. Without this, companies lack the ability to make risk mitigation

decisions with confidence.

While the related issue of process automation to speed data aggregation and exposure calculation rank

next-highest in priority, less-related issues like lack of knowledge and lack of management priority ranked

significantly lower.

Foreign Currency Data Issues And Process Transparency

Challenges related to confidence in data and difficulty in quantifying exposures expressed in this survey

have their roots in accounting errors, break-downs in accounting controls, system configuration issues and

process deficiencies to which treasury has limited visibility.

Lacking this visibility, data integrity issues are extremely difficult to detect until a major problem has surfaced.

Frequently, off-setting data errors and omissions can falsely mask the true magnitude of a company’s

exposure in ways that make it difficult to get to the source of an error. This accounting volatility can evolve

into a pervasive, self-reinforcing problem that grows increasingly complex and intractable over time.


The biggest accounting and organizational issue impacting accurate FX exposure calculation is manual

accounting processes. The improper recording and relief of a transaction, and improper, unilateral recording

of intercompany transactions are two prevalent sources of error that can seriously distort a company’s

foreign exchange exposure. As a result, the exposure is not visible and cannot be managed by Treasury.

The foreign currency gain/loss associated with this transaction exposure is not realized incrementally in

conjunction with the process of account revaluation. Rather, it is realized all at once, when the transaction is

cleared or settled.

FX-related system configuration, administration and maintenance issues in most major ERP systems result

in inconsistent revaluation of accounts across the enterprise. Examples of accounts that should be revalued

but are not, and accounts that are being revalued, but shouldn’t be, are widespread in companies relying on

today’s most popular ERP systems. In most cases, companies are unaware of the problem.

Achieving Timely and Complete FX Data

As expressed in the survey, in a period of heightened FX volatility, the ability to achieve timely access to

complete and accurate FX data is critical a company’s ability to effectively monitor and manage FX risk.

Survey results further support the idea that timeliness alone is not enough. With no clear correlation between

the frequency of monitoring of FX exposure and/or automation of trade- or post-trade processes, making

decision faster based on suspect data only results in bad results delivered more quickly.

ConclusionThe real problem highlighted by these study results is that, essentially, treasurers and controllers alike don’t

know what they don’t know about their foreign currency exposure data. All too often, the first symptom of a

problem shows up as a material misstatement of FX gain/loss with serious consequences.

For treasury to overcome the challenges identified in this survey and improve FX gain/loss results, they must

first achieve greater awareness of the problem. Automated foreign exchange exposure management solutions

available today can help treasurers achieve broader and deeper visibility to the foreign currency exposure

data they receive from accounting. As a result, treasurers are equipped to identify potential sources of error

or inconsistency, increasing their confidence in their FX management decisions and outcomes.

Transparency to account-level foreign currency exposure details for all currencies provides them with the

evidence and insight needed to root out fundamental problems and achieve a complete and accurate FX

exposure calculation. Automatic FX exposure calculations, presented in dashboard views by currency, make

it easier for treasurers to quickly identify the greatest sources of risk (or potential for cost savings) to the

organization. Trend reporting in today’s automated FX exposure management systems.


The combination of transparency and operational efficiency gained by automating the gathering and

validation of data, along with the calculation of FX exposures, allows treasury to focus their efforts on

continuous operational improvements, and to analysis and decision-making that results in more effective

FX risk mitigation.

Next Steps In light of these findings, it is worth evaluating how much confidence you have in the data you use to manage

your foreign exchange risk? Today, with global currency volatility increasing and sudden directional shifts

becoming the norm, companies that have not accurately identified and quantified their FX exposure will

continue to face with serious economic and compliance consequences.

Contact Us

Contact FiREapps today to take a closer look at your corporation’s foreign currency exposure. Simply fill

out a request form online at http://www.fireapps.com/contact/info or contact FiREapps by phone at

+1 866-928-FIRE (3473) or via e-mail at [email protected].

About FiREappsFiREapps is the leading provider of corporate foreign exchange exposure management technologies.

Established in 2005, FiREapps developed the first solution to automate foreign exchange exposure

management for multinational companies, delivering unparalleled expertise and driving measurable results.

FiREapps is dedicated to helping companies to quantify their foreign exchange exposure and cost-effectively

isolate their organization from the uncertainty of currency volatility. Through a combination of Web-based

software solutions and client services, FiREapps helps companies to ensure they have the proper accounting

in place to accurately measure and manage foreign exchange exposures, providing software tools and expert

analysis that make it easy to maintain reliable FX exposure data, analyze foreign exchange exposures and

their root causes, and make optimal decisions to eliminate exposures and reduce risk.

For more information visit www.fireapps.com

About SunGardAbout AvantGard

SunGard’s AvantGard is a leading liquidity management solution for corporations, insurance companies

and the public sector. AvantGard provides chief financial officers and treasurers with real-time visibility into

cash flows and increased operational controls around receivables, treasury and payments. AvantGard helps


companies drive free cash flow and reduce inefficiencies across the ecosystem of suppliers, buyers, banks

and other trading partners. For more information, visit www.sungard.com/avantgard

About SunGard

SunGard is one of the world’s leading software and IT services companies. SunGard serves more than

25,000 customers in more than 70 countries, including the world’s 25 largest financial services companies.

SunGard provides software and processing solutions for financial services, higher education and the public

sector. SunGard also provides disaster recovery services, managed IT services, information availability

consulting services and business continuity management software. With annual revenue exceeding $5

billion, SunGard is ranked 472 on the Fortune 500 and is the largest privately held business software and

services company on the Forbes list of private businesses. Based on information compiled by Datamonitor*,

SunGard is the third largest provider of business applications software after Oracle and SAP. Continuity,

Insurance & Risk has recognized SunGard as service provider of the year an unprecedented five times.

For more information, please visit SunGard at www.sungard.com.


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