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RISK MANAGEMENT | 19 AUGUST 2022

A Better Way To
Monitor FX Hedges

Absa | Corporate and Investment Banking > Insights and Events > A Better Way To Monitor FX Hedges
Absa-CIB-Author

Aphile Molefe

Head of eFX Sales SA, Absa CIB

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Tracking currency hedges is an important element of managing a company’s foreign exchange risk, but using spreadsheets to do the job can be complicated – and risky.

Currency hedging requires a depth of expertise in forex markets that many businesses simply do not have. The exercise also requires constant – and extensive – monitoring and reporting. Many companies use spreadsheets for this, recoding basic data like expected exposures and foreign exchange (FX, or forex) cash flows, and tracking achieved rates versus budget rates and the forward curve.

“That’s great, but it only gets you so far,” says Aphile Molefe, Head of eFX Sales South Africa at Absa CIB. “Those spreadsheets become quite complex when exotic FX options are introduced.”

Holding those records in spreadsheets also brings further layers of risk, as Molefe explains. “If you have to report your progress to stakeholders, they might struggle to understand the information if the spreadsheet is not laid out correctly,” he says. “There’s also a built-in ‘key man’ risk, where if one person has built and managed the spreadsheet, when they leave and nobody else knows how to update it, that could really hurt the company’s ability to track and report. And that’s just the start of it. Spreadsheets can also be error-prone – and making decisions based on errors can be costly in the FX world.”

Companies can mitigate the inherent risk of spreadsheets by using treasury management software, which uses validated models in the back end and easy-to-understand graphical user interfaces at the front. But as Molefe points out: “The reality is that the software tends to be quite expensive, limiting the use to larger corporates that can afford them.”

Tracking hedge KPIs digitally

Digital tools can, for example, make it easy for clients to input their expected foreign currency cash flows, as well as other parameters like their budget rate and hedging policy. They can then keep track of what they have achieved against these key performance indicators. “If, for example, the client’s budget rate for the year is R14,50 to the US dollar and the exchange rate goes up to R15,50, there are significant implications for the client’s cash flow and margins, especially if they can’t easily pass the pricing impact on to clients,” Molefe explains. “Software can help them to track and monitor their hedging positioning in real time.”

Using further data analytics, the client can then apply “What if” analysis to see what impact a rate move of, for example, 10% in one direction or another might have. The client can then be proactive in determining the hedge strategy and products required to avoid a worst-case scenario or to take advantage of an expected best-case scenario.

The opportunity for banks

Molefe believes that the industry-wide digitisation of FX services allows for far more than merely quick and convenient trade executions. “Banks can perhaps help clients by taking away their need to hire expensive FX skills to build complex, potentially error-prone spreadsheets,” he says.

For banks this is an opportunity to have a scalable way to access valuable insight into clients’ hedge positioning. “Some banks have offered this software to clients with the intention that it would help to deepen their relationship with their clients,” he adds. “In corporate FX, we know that the bank that clients favour the most is the bank that understands them the best,” he says. “It’s the bank that proposes relevant solutions based on the client’s actual situation.”

Tracking hedge positions is very difficult for many corporate FX treasuries, Molefe concludes. “If banks could help them with that, that could be a real value-add.”

Absa-CIB-Author
Aphile Molefe

Head of eFX Sales SA, Absa CIB

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