Comparing & Contrasting Corporate Currency Risk Management (Video)

Comparing & Contrasting Corporate Currency Risk Management (Video): Discover the most common derivatives used by corporations and explore how FX risk management practices differ among peers. This video is a preview of FX Initiative’s FX Risk Management webinar 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.

Preparing FX Risk Policies (Video)

Preparing FX Risk Policies (Video): Explore how global firms such as Apple formally plan clear parameters and guidelines for managing foreign currency risk. This video is a preview of FX Initiative’s FX Risk Management course as part of Learning Objective #2.

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.

Recognizing FX Revenues & Receivables (Video)

Recognizing FX Revenues & Receivables (Video): Explore the economic and accounting similarities and differences between forecasted and booked foreign exchange (FX) transactions using the FX Transaction Simulator tool.

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.

Prioritizing FX Risk Policies & Procedures (Video)

Prioritizing FX Risk Policies & Procedures (Video): Learn the importance of a foreign exchange (FX) risk management policy and explore how firms such as Apple put formal plans into place. This video is a preview of FX Initiative’s FX Risk Management course as part of Learning Objective #2.

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.

Tracking FX Transaction Types (Video)

Tracking FX Transaction Types (Video): Explore the 4 kinds of FX transactions using Apple as an example.  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.

Explore the Zero Sum Game of FX Gains & Losses

Hedging foreign exchange risk can be viewed as a zero sum game, meaning that when one side of the hedge gains the other side loses. The degree by which those gains and losses do or do not perfectly offset depends on the derivative instrument, hedge coverage level, and strategy used. The FX hedge game isn't about winning or losing, it's about making the outcome more certain.

Balance sheet hedging is the most common practice among multinational corporations, and the goal is often to reduce foreign exchange gains and losses on the income statement to zero. The most effective way to largely achieve this goal is to hedge using a forward contract, which has a symmetrical payoff profile relative to the spot exchange rate, and to hedge 100% of the underlying exposure. However, even under this perfect scenario, there will still be residual FX gains and losses reported in earnings.

When companies hedge near 100% of their balance sheet exposures using forward contracts, controllers and treasurers often wonder why they are never able to achieve that zero sum outcome entirely. This is due to the forward point component of the forward rate on the derivative contract, and the fact that forward contracts are revalued based on forward rates compared to the underlying spot exposure, which is revalued based on spot exchange rates.

As a result, there will almost always be a difference in the "mark-to-market" accounting of a forward contract hedge and an underlying spot exposure. The only time this would not be the case is if interest rates were exactly equal for the countries or regions associated with the two currencies in the pair, which is highly uncommon. This is a typical area of frustration global corporations struggle with, and it highlights that understanding the accounting for underlying exposures and derivatives can clarify why there is a residual impact in earnings. Furthermore, it helps set realistic expectations as to what can be achieved when trying to play the zero sum game of FX hedging.

FX Initiative's Currency Risk Management Training covers balance sheet hedging in detail using Apple as an example to show how multinational corporations can hedge common exposures such as receivables and payables with forward contracts to mitigate foreign exchange gains and losses on the income statement. Our focus is on both the cash flow and financial reporting aspects of the hedge strategy, and we reinforce our teaching with visual displays of the economic and accounting ramifications.

If you are interested in learning how to hedge FX balance sheet exposures, forecasted transactions, and net investments in foreign subsidiaries, start your training today and explore our real world examples of all three scenarios. Furthermore, you can use our FX Transaction Simulator and Foreign Subsidiary Consolidator to customize your own risk model using company specific variables that reflect your actual exposures. Our video based curriculum puts academic theory into practice, and can help you and your team deliver more effective bottom line results in a time efficient manner. Take the FX Initiative for your organization by subscribing here.

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Cheers,

The FX Initiative Team
support@fxinitiative.com

The iPhone X Index: A FX Comparison Tool

The Economist magazine first published the Big Mac Index in 1986 as a novel way to compare currency prices. The premise of the Big Mac Index is based on the theory of purchasing power parity (PPP), which states that the exchange rate between two currencies is equal to the ratio of the currencies' respective purchasing power. While this can be a rather sophisticated academic theory, the Economist made the concept of “bugernomics” more relatable to a widespread audience.

In simplest terms, the “burgernomics” of the Big Mac Index implies that the same good, a Big Mac, should cost the same in any two countries based on current market exchange rates. To use an extreme example, if today’s euro (EUR) / U.S. dollar (USD) exchange rate is equal to 1.16 and a Big Mac in the U.S. costs USD 1.16, then a Big Mac in the Eurozone should cost EUR 1.00. When there is a price difference in Big Macs between two countries, one of the two currencies in the pair is considered under or overvalued.

More specifically, the Economist 2017 update to the Big Mac Index shows that “the average price of a Big Mac in America in July 2017 was $5.30; in China it was only $2.92 at market exchange rates. So the "raw" Big Mac index says that the yuan was undervalued by 45% at that time.” While the Big Mac Index is not a precise approach for valuing currencies and identifying arbitrage opportunities, it is a fun and approachable way for the lay person to learn about foreign exchange valuations.

Click here to explore the Economist’s interactive Big Mac Index

To expand the analysis to other goods and services, FX Initiative has applied the same logic to create the iPhone X Index. For example, the recently released iPhone X is a high demand global product that Apple sells to consumers worldwide in several different currencies. In theory, the same iPhone X should cost the same in any two countries based on current market exchange rates. However, similar to the Big Mac Index, there is a significant variation in U.S. dollar equivalent costs as follows:

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From this simple example, we can see that the best value is purchasing an iPhone X denominated in Japanese Yen, which saves approximately USD 1.00 or 0.10% compared to U.S. dollar pricing. In contrast, the worst deal appears to be purchasing an iPhone X denominated in euros, which would cost an additional USD 369 or 36.9% more. The FX economic misalignment is clear from a theoretical perspective, but practically speaking most consumers will still buy the iPhone X in their local currency.

This article underscores FX Initiative’s mission to make complex foreign currency matters simple and manageable. Our currency risk management training provides educational videos, interactive examples, and webinar events on best practices from leading companies such as Apple. We help global businesses and financial institutions optimize their foreign exchange risk profiles to efficiently and effectively mitigate earnings volatility and preservice cash flows. To get started, take the FX Initiative today!

Grasping Groupon’s Passive FX Risk Management

FX Initiative analyzes how publicly traded companies manage foreign exchange risk. This analysis will focus on Groupon, a Chicago based worldwide e-commerce marketplace, and their passive approach to FX risk management. Using their 10-Q for the quarterly period ended June 30, 2017, let’s explore Groupon’s International segment and its FX impact on their Income Statement.

The Income Statement shows a company’s revenues and expenses during a particular period. The Income Statement in simplest terms totals revenues and subtracts expenses to find the bottom line or net income for the period. Using Groupon’s reported numbers from their Securities and Exchange filing, their International segment’s Income Statement is as follows:

^{_{Source: http://investor.groupon.com/secfiling.cfm?filingID=1490281-17-111}}

The words "foreign exchange", "foreign currency", and "FX" are mentioned 12 times in their earnings announcement, yet Groupon (unlike leading technology companies such as Apple and Google) is not managing their foreign exchange risk at all. Let’s examine Groupon’s FX risk profile by digging into their revenue, expense, and gross profit figures.

• Revenues - Groupon’s revenue increased $27 million in their International segment, but declined $13.8 million due to changes in foreign exchange rates. In other words, Groupon intentionally grew their International revenue by increasing transactions in their Goods category, but unintentionally lost over 50% of that growth due to unhedged foreign exchange risk.
• Expenses - Groupon’s International segment expenses (cost of revenue) increased $29.9 million, but declined $6.9 million due to changes in foreign exchange rates. This increase in expenses was attributable to increases in direct revenue transactions in their Goods category, and unhedged FX risk reduced those expenses favorably but unintentionally by roughly 23%.
• Gross Profit - Groupon’s International segment’s gross profit declined by over $19 million or nearly 10%, and $6.9 million was lost due to unhedged foreign exchange risk. Not only did Groupon’s International segment report lower gross profit across all three of their Local, Goods and Travel categories, they lost even more money as a result of not managing their FX risk exposures.

Groupon’s International segment accounts for approximately 30% of their total revenue, which is a material amount. In comparison, Apple’s International sales accounted for 61% of their third quarter 2017 revenue, and they were awarded the Best Corporation in the World for FX Management by Global Finance Magazine in their 2017 Corporate FX Awards.

Whether you are a shareholder, vendor, creditor, employee or layperson, do you think Groupon should be managing their foreign exchange risk? FX Initiative’s training uses real world examples from Apple to demonstrate how multinational corporations like Groupon can significantly improve their international performance by employing currency risk management best practices.

If you are interested in learning how your organization can improve their foreign exchange risk management program, sign up for FX Initiative’s currency risk management training today. Our educational videos, interactive examples, and webinar events simplify complex FX risk management issues and equip you with actionable intelligence to effectively mitigate FX risk.

Ready to learn FX Risk Management Best Practices? Click here to get started!

The FX Initiative Team
support@fxinitiative.com

Apple's FX Risk Management Plan

Foreign exchange risk management involves identifying, analyzing, and prioritizing various foreign currency exposures, and developing and implementing a coordinated and systematic plan that utilizes company resources efficiently and effectively to mitigate and optimize FX risk. The degree to which companies implement adequate foreign exchange risk management practices can vary substantially, from not managing the risk at all to engaging in robust hedging activities, and as a result, the impact on the bottom line can vary widely across organizations.

When it comes international business success, Apple is a global technology leader not only in terms of their product innovation but also in how they manage their foreign exchange risk exposures inherent in their worldwide operations. Looking at Apple’s 2015 Annual Report (Form 10-K), the following 4 minute video clip from FX Initiative's newly released course titled "FX Risk Management" reveals Apple's foreign exchange risk management plans.

If you found this information insightful, become a FX Initiative subscriber today and access our complete suite of foreign exchange (FX) continuing professional education (CPE), examples and events at FXCPE.com. Managing FX risk has become a higher priority for many firms for 2017 and it is now easier than ever to learn the fundamentals of currency risk management. Make this the year to reduce FX risk and reap rewards abroad by taking the FX Initiative for your international business today!

Click here to subscribe >

Cheers to your global organization's continued success in the new year,

The FX Initiative Team
support@fxinitiative.com

Exposing Apple's FX Transaction Risk

Apple is the most valuable company in the world, and in 2015 impressively captured not only the largest market cap, but also the largest sales, profits, and assets among the world's biggest technology companies.

-Forbes, "The World's Largest Tech Companies: Apple Beats Samsung, Microsoft, Google"

As a result, it's no surprise that many businesses look up to Apple to follow their lead in terms of research and development, manufacturing, and sales among other areas of innovation. However, many multi-national firms can also benefit greatly from observing Apple's best practices as it relates to identifying and managing foreign currency transaction risk.

Apple’s unaudited summary financial results for the fiscal 2015 fourth quarter revealed that international sales accounted for 62 percent of the quarter’s revenue, which totaled $51.5 billion dollars. This highlights that in a matter of 3 months, the equivalent of almost 30 billion US dollars worth of product was sold overseas, and more than half of their revenue in a single quarter was generated from outside of their headquarters in the United States. Apple's sizable revenue generation is just one component of their foreign exchange risk profile.

Taking a more comprehensive view of Apple's foreign exchange risk profile, the following 7 minute video clip from FX Initiative's newly released course titled "FX Risk Exposures" exposes the various types of foreign currency transaction risk inherent in Apple's global business model.

If you found this information insightful, become a FX Initiative subscriber today and access our complete suite of foreign exchange (FX) continuing professional education (CPE), examples and events at FXCPE.com. Managing FX risk has become a higher priority for many firms for 2017 and it is now easier than ever to learn the fundamentals of currency risk management. Make this the year to reduce FX risk and reap rewards abroad by taking the FX Initiative for your international business today!

Click here to subscribe >

Cheers to your global organization's continued success in the new year,

The FX Initiative Team
support@fxinitiative.com