Foreign Exchange Management

In global trade, companies often have to deal with foreign currencies and cannot enforce invoicing in EUR only. The development of the exchange rates of different currencies is often hard to predict and thus poses some risks for multinational companies dealing with them.

To reduce currency risks, you therefore conclude hedging transactions with banks or other counterparties in accordance with corporate policy requirements. It is quite common to define hedge ratios for this purpose, which can be used for simple orientation when optimising the hedging for certain currencies.

A treasury management system supports the corporate treasury manager in identifying foreign exchange risks, evaluating and hedging them, ongoing monitoring and documentation. The goal of his actions is usually to minimise losses from exchange rate fluctuations by concluding suitable hedging transactions at low transaction costs.

Trinity TMS Functions at a Glance

• Up-to-date overview of the company-wide foreign currency positions
• Recording, mapping of foreign exchange transactions (spot, forward, NDF, options, etc.)
• Valuation based on automatically imported and historized foreign exchange rates
• Determination of the FX exposure/foreign exchange risk
• Current hedge status by comparison with specified hedge ratio
• Connection to internet trading platforms (e.g. 360T, FXAll)
• Separation of front/(middle)/back office, dual control principle
• Extended documentation by attaching documents or link to DMS
• Definition of limits for traders, currencies or maximum loss
• Simulation of different price developments
• Settlement via defined standing instructions
• Due date monitoring
• Netting of Foreign Exchange payments before settlement with bank
• Release of affiliates’ staff from foreign exchange management
• Automated matching (e.g. via Finastra, Broadridge)
• Automatic account assignment and posting of cash flows and valuations

Benefits

Best Practice

Trinity TMS helps to determine the foreign exchange positions and to continuously check the degree of hedging by determining the company-wide foreign exchange positions as well as the already hedged shares from the currency-differentiated planning and comparing them with the specified hedge ratio (= part of the total position to be hedged).

For global use, the positions of all companies are also included so that natural hedges can be taken into account. If under-hedging is identified, further hedging transactions can be concluded depending on the duration of the gap. Over-hedging may have to be dissolved, as this entails unnecessary costs.

From the exposure overview it can be quickly determined for which currency position and duration a hedge is needed and the appropriate instrument can be selected. Unless the companies sell the currency directly in the form of spot transactions, most companies limit themselves to forward deals when hedging against foreign currency fluctuations, as these are inexpensive, clearly calculable and easy to understand. If the currency risks relate to non-convertible currencies (e.g. ARS, KRW or TWD), non-deliverable forwards (NDFs) can be used. The NDF is similar in concept to a forward transaction, except that it is not settled in the non-convertible currency, but in a convertible currency such as EUR, CHF or USD. Sometimes various types of currency options or currency swaps are also used in corporate treasury.

A treasury system supports the mapping, valuation, monitoring of effectiveness and maturities and provides a quick insight into the current situation. The valuation requires recourse to current market data, which can be obtained via an automated feed from providers such as Infront, Refinitiv or Bloomberg, the import of foreign exchange rate files supplied by the bank via EBICS (or manual entry for a few, not particularly risky currencies). The currency rates deposited in Trinity TMS are historized for retrospectives and can also be used for all other modules.

Trader, currency or loss risk limits can be defined for trading. The more frequently a company needs to hedge against exchange rate fluctuations, the more worthwhile it is to use an internet trading platform. Based on the exposure planning, the treasurer can communicate his request to previously selected banks and immediately receive current conditions. At the push of a button or by means of previously defined rules, the transaction is concluded with the desired counterparty, transferred to the "Foreign Exchange (FX)" module of Trinity TMS and confirmed via a subsequent automated matching. For settlement vis-à-vis the bank, the number of chargeable settlement transactions can be minimised by integrated foreign exchange netting.

All cash flows from foreign exchange transactions are immediately reflected in liquidity planning and cash management without having to be re-entered.

Underlying and hedging transactions can be assigned n:m as valuation units, their effectiveness can be checked and both cash flows and valuations may be transferred to automatic posting in financial accounting via the account assignment module.

Blogs

Foreign Exchange Management

Case Study

TMD Friction

Vitesco

Tags

FX-Exposure, FX-Management, Forward-Exchange, Currency-Hedging, FX-Risk, Risk-Management, Volatility, Hedge-Ratio, FX-Trading