August 2019 Newsletter

Explore our August 2019 newsletter and discover the latest blog posts and insights from FX Initiative. We help finance, accounting, treasury, and sales professionals stay up to date with new training content, CPE webinars, and helpful tips & resources.

Get started with our foreign exchange risk management training, which provides 24/7 365 access to our complete suite of foreign exchange (FX) continuing professional education (CPE), examples and events at FXCPE.com. Start Training >

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Professional Development Planning & Profitability

Professional development in the workplace often refers to required employee training in areas such as workplace safety, corporate policies, and industry specific rules and regulations. While this training is commonplace in the corporate setting, it rarely provides value add to the employee or organization in terms of job performance and profitability.

FX Initiative's approach to professional development focuses on practical employee training and delivering actionable insights. We start by identifying knowledge gaps using our Pre-Test Evaluation, then we close those knowledge gaps with our on-demand educational videos, and we reinforce our learning concepts using real-world examples.

Professionals tasked with foreign exchange risk management often know their goals and objectives, but struggle with how to achieve them due to lack of training. Without practicing what you've learned and investing time and resources into education, it seems unrealistic to expect positive bottom line results and achievement of target plans.

The organizations FX Initiative works with recognize that investing in quality training that directly relates to employee job responsibilities benefits both the employee and the bottom line. Not only are employees more knowledgeable and capable after completing our training, but they are able to apply their knowledge for the benefit of their customers and the firm.

FX training is a win-win outcome.

1. FX sales teams are able to have deeper conversations with clients, gain a better understanding of problems and available solutions, and secure long-term relationships that are mutually beneficial to both parties.
2. Treasury professionals are able to significantly reduce FX gains and losses, preserve cash flows from FX transactions, and articulate their results more clearly and confidently to senior management.

FX Initiative's Currency Risk Management Training provides a valuable turnkey plan for learning foreign exchange that helps FX sales teams collaborate more effectively with treasury professionals. FX service providers and global firms can take full advantage of our unique FX training opportunity by proactively investing in their employees and organizations. Professional development is no longer something to simply check off the list, it is now a priority for global companies and their employees to remain competitive and profitable.

To learn more, start your FX risk management training today, which provides 24/7 365 access to our complete suite of foreign exchange (FX) continuing professional education (CPE), examples & events at FXCPE.com.

Exploring FX Economic Risk (Video)

Exploring FX Economic Risk (Video): Explore the concept of foreign exchange (FX) economic risk and recognize its macro impact on the financial statements and global business opportunities. This video is a preview of FX Initiative’s FX Risk Exposures course as part of Learning Objective #1.

To learn more, start your FX risk management training today, which provides 24/7 365 access to our complete suite of foreign exchange (FX) continuing professional education (CPE), examples & events at FXCPE.com.

May 2019 Newsletter

EDUCATION | EXAMPLES | EVENTS   May 2019 Newsletter Learn How To Manage FX Risk Featured Course The FX Market Overview course explores the concepts of economic globalization and international trade, examines the evolution and operations of the foreign exchange (FX) market, and demonstrates how supply and demand impact FX rates and forecasting. Read More » Featured Resource The FX Terms Glossary defines key terms related to FX risk management. This online dictionary is designed to clarify the FX conversation, and helps you develop a working vocabulary of important and frequently encountered concepts concerning foreign currency. Read More » Featured Webinar The FX Risk Management webinar focuses on the fundamentals of corporate FX risk management, explores how leading multinational firms prioritize and manage the 3 types of FX risks, and demonstrates best practices for assessing your company’s FX risk profile. Read More »   support@fxinitiative.com | 312-566-7475 | www.fxcpe.com     © FX Initiative, LLC | All rights reserved | Unsubscribe from list.

Learn the Language of FX Risk Management

Ready to learn the language of FX risk management? FX Initiative’s FX Terms Glossary will teach you the key terms and definitions related to FX risk management. Newcomers and seasoned professionals alike can leverage this online dictionary to clarify the conversation, and develop a working vocabulary of important and frequently encountered concepts concerning foreign currency. Get started with our foreign exchange risk management training, which provides 24/7 365 access to our complete suite of foreign exchange (FX) continuing professional education (CPE), examples and events at FXCPE.com. Start Training>

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Discover the Different Types of FX Derivatives

Do you want to discover the different types of FX derivatives in detail? FX Initiative’s FX Spot & Derivatives course will help you distinguish the different type of FX derivatives firms employ to effectively hedge FX risk. This program provides a comparative analysis of FX derivatives with simulated examples to demonstrate the instruments your firm can use. Get started with our foreign exchange risk management training, which provides 24/7 365 access to our complete suite of foreign exchange (FX) continuing professional education (CPE), examples and events at FXCPE.com. Start Training >

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Attend the Net Investment Hedging webinar!

You're invited to the FX Forward Contracts webinar!

Practice Pricing Foreign Exchange Option Contracts

Option contracts are financial contracts that give the buyer the right, not the obligation, to buy or sell a quantity of a particular currency at a specific exchange rate, called the strike rate, on or before a pre-arranged date. A call option is the right to buy a particular currency, and a put option is the right to sell a particular currency. An option is a right, not an obligation, so it will be exercised only when it is favorable to do so.

An option is comprised of two value drivers, (1) intrinsic value, which is the difference between the strike rate on the contract and the then prevailing spot rate in the market, and (2) time value, which is any excess value beyond intrinsic value related to time to maturity.

A purchased option begins its life as an asset in the amount of the option premium paid to the counterparty at inception, typically purely time value, and will expire with a either a positive intrinsic value or zero fair value. When intrinsic value is positive, it is referred to as “in the money” since the strike rate is more favorable than the spot rate, and when intrinsic value is zero is referred to as “at the money” if the strike rate is equal to the spot rate or “out of the money” if the strike rate is less favorable than the spot rate.

Options, when hedging, secure the value of an underlying position, providing 100% protection against unfavorable market moves beyond the strike rate, while retaining 100% participation in favorable market moves, which may justify the premium paid. Options tend to be used most frequently for longer dated exposures such as forecasted transactions, since the greater the timeframe, the greater the potential for the market to move materially, which creates greater potential to participate in favorable market movements.

Options are also attractive for scenarios where there is uncertainty the exposure will materialize, such as a bid to award contract or a forecasted acquisition, since an option is a right, not an obligation. Options provide a high degree of certainty and the greatest degree of flexibility, but are employed less frequently in practice when hedging due to the premium paid up front.

In order to price an option contract, a number of option pricing models can be used in the marketplace, but currency options are priced most often using the Garman-Kohlhagen option-pricing model. The Garman-Kohlhagen option-pricing model is a complex equation that takes into account the following six variables:

1. The spot foreign exchange rate
2. The interest rate on the base currency
3. The interest rate on the terms currency
4. The strike rate of the option
5. The time to expiration
6. The volatility of the currency pair.

To illustrate the concept of an option contract, this Foreign Exchange Derivative Speculator can model the economic and accounting aspects of both a put and a call option. The first step is to select a long position, which represents a call option to buy the currency, or a short position, which represents a put option to sell the currency. The next step is to enter the parameters of the trade, which includes specifying the currency pair, spot rate, trade date, expiration date, notional amount, and currency quoting convention.

In step 2, select an option contract as the foreign exchange derivative instrument, and enter the pricing variables outlined above, which include the domestic and foreign interest rates, the strike rate (which is the exchange rate that the option contract can be exercised at), and the volatility of the currency pair. You can change any of the option variables to instantly see the impact on the premium, or cost, of the option contract.

For example, adjusting the strike rate lower or higher will increase or decrease the premium of the option contract. Similarly, changing the level of implied volatility in the currency pair impacts the price of the option as well, whereby the more volatile the currency pair, the more expensive the option premium.

In step 3, the ending spot rate can be adjusted to see how changes in the spot rate on the expiration date impact the economic value of the option contract. This tool demonstrates how the option will only be exercised when the strike price is more favorable than the ending spot rate. If the ending spot rate is more favorable for buying or selling the currency than the strike rate, the option finishes "out of the money" such that the maximum loss on the contract is the premium paid. Conversely, if the ending spot rate is less favorable for buying or selling the currency than the strike rate, the option finishes "in the money" and equals a positive value.

You can practice pricing foreign exchange options using the Foreign Exchange Derivative Speculator to illustrate the economics and accounting of an option contract, both a put and a call, and to see how variables such as the option strike rate and implied volatility impact the premium or cost of the option at inception. Additionally, you can explore how options can finish "in the money" where a cash payment is received at maturity, or "out of the money" with a zero fair value where no further payment is required to settle the contract.

Take advantage of this unique learning resource to discover the three key distinguishing characteristics of vanilla option contracts, which include (1) the premium paid upfront, (2) the asymmetrical payoff profile relative to the spot foreign exchange rate, and (3) the lack of obligation to make a payment at maturity.

If you are interested in learning more about option contracts, sign up for FX Initiative's Currency Risk Management Training and benefit from our educational videos and interactive examples. Our course on Foreign Exchange Spot & Derivatives walks you through real-world examples of using derivative instruments, and leverages our Foreign Exchange Derivative Speculator to illustrate essential concepts. Foreign exchange options pricing can be complex, but our approach simplifies the academic theory and focuses on the practical application of using options to help your international organization achevei their foreign exchange risk management objectives.

Ready to practice pricing foreign exchange options? Click here to get started!

Cheers,

The FX Initiative Team
support@fxinitiative.com

Identify the Top Two FX Hedge Objectives

Companies that hedge foreign exchange must establish clear objectives in order to gauge the efficacy of their FX risk management program. While the priority of hedge objectives can vary between public and private companies, the same two overarching goals apply: (1) minimizing earnings volatility and (2) preserving cash flows. Gaining a better understanding of these two objectives can help organizations better decide how to allocate resources to achieve their desired economic and accounting results.

First, minimizing earnings volatility means neutralizing to the greatest extent possible the Income Statement impact of fluctuating foreign exchange rates. At the highest level, this requires aligning the accounting treatment for the derivative with the accounting treatment for the underlying exposure to achieve equal and offsetting gains and losses at the same time and in the same geographic area of the financial statements.

When hedging forecasted transactions that do not impact the Income Statement on a current basis, minimizing earning volatility often involves the use of elective “cash flow” hedge accounting treatment, which provides the timing benefit of deferring derivative mark-to-market gains and losses in equity during the forecast period and the geography benefit of accounting for the derivative gain or loss in the same financial statement line item as the forecasted exposure.

When hedging booked transactions that do impact the Income Statement on a current basis, neutralizing earning volatility refers to using the "default" accounting treatment, whereby the highly visible foreign exchange gains and losses related to the underlying exposure and the derivative hedging instrument work in tandem to create a largely equal offset in earnings that mitigates Income Statement volatility automatically at the end of each reporting period.

When hedging net investments in foreign subsidiaries that are accounted for in equity, reducing earning volatility means using elective "net investment" hedge accounting treatment, which allows for derivative gains and losses to be recorded in other comprehensive income (OCI), which is a component of equity, as part of the cumulative translation adjustment (CTA) until the point in time that a sale or liquidation event of the net investment occurs.

Second, preserving cash flows means reducing the variability in functional currency equivalent cash flows resulting from foreign currency transactions. When hedging booked and forecasted transactions, this means hedging to stabilize the amount of cash received or paid upon conversion of the foreign currency at a later date. When hedging net investments in foreign subsidiaries, preserving cash flows can involve a variety of strategies depending on the short and long term goals of the organization. For example, 3 different cash flow strategies include, (1) hedging excess cash balances that are held by foreign subsidiaries and that may eventually be remitted back to the parent, (2) hedging the value of a net investment position to preserve cash flows related to an anticipated sale or liquidation event of the foreign operation in the short or medium term, or (3) not hedging the position in a long term foreign subsidiary that may require cash settlement upon expiration of the derivative instrument.

While these concepts can get quite technical in detail, the overarching theme is that both public and private companies are focusing on the same two foreign exchange risk management hedging objectives: (1) minimizing earning volatility and (2) preserving cash flows. Public companies are often most concerned with mitigating periodic earnings volatility, which suggests they prioritize goal number 1 of minimizing earnings volatility over preserving cash flows. In contrast, private companies are usually more concerned about the economics over the accounting implications, which implies they focus more on preserving cash flows first and foremost. The key highlight is that public and private companies usually have different priorities between the same two FX hedge objectives.

To learn how your organization can prioritize and achieve your company’s specific hedging objectives, sign up for FX Initiative's currency risk management training to start learning best practices. We offer a complete continuing professional education (CPE) curriculum for controlling currency risk consisting of on-demand educational videos, interactive real-world examples, and live webinar events that can be customized to your organization’s particular needs. Take the FX Initiative today to learn how we help both Fortune 500 companies and small and medium-sized enterprises (SMEs) understand, identify, assess and mitigate foreign exchange risk.

Ready to achieve your FX Risk Management objectives? Click here to get started >

The FX Initiative Team
support@fxinitiative.com