White Label FX Web Applications

FX Initiative's white label web applications are designed to help treasury professionals and FX sales teams with a wide variety of foreign exchange (FX) risk management challenges and opportunities. Whether you are creating a FX risk policy or analyzing economic and accounting scenarios, our risk models and strategy simulations share best practices in easily understandable formats.

Examples include:

Identify The Top Two FX Hedge Objectives

Ready to optimize your firm’s FX hedge objectives? FX Initiative’s Hedging FX Transactions course covers best practices employed by Fortune 500 companies and small and medium-sized enterprises (SMEs) for achieving the top two FX hedge objectives, illustrated in detail with real world economic and accounting examples. 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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How to Test FX Transactions & Hedge Strategies

Ready to learn how to test FX transactions & hedge strategies? FX Initiative’s Foreign Exchange Transaction Simulator is a risk modeling tool that illustrates common FX exposures such as revenues, expenses, receivables and payables. The result is a detailed and interactive FX risk analysis that charts the economic payoff of a hedge strategy along with accounting journal entries and references to U.S. generally accepted accounting principles (GAAP). This tool serves to simplify the risk analysis process for you so you can focus on the practical bottom line impact to your global business. 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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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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The FX Initiative Team
support@fxinitiative.com

How to Compare Currency Derivatives & Credit Considerations

Foreign exchange risk management involves the use of currency derivatives, which are financial contracts between two parties whose value is derived from the exchange rate of one or more underlying currencies. In order to use currency derivatives to achieve foreign exchange risk management objectives, companies must be able to deal or trade with a credit worthy counterparty such as a bank or financial institution.

Counterparty credit risk is the risk that the counterparty to a contract does not perform, and is involved in any banking activity, including trading currency derivatives. Therefore, both parties in the transaction need to consider the financial condition of their counterparty by quantifying their creditworthiness. It can be helpful to compare key credit considerations between the three most common currency derivatives, which include forward contracts, vanilla options, and zero cost collars.

Forward contracts involve the exchange of two currencies at an agreed upon rate on the date of the contract for settlement on a date more than two business days in the future. A forward contract will almost always finish in either an asset or liability position at maturity depending on the ending spot rate. From a credit perspective, forward contracts usually do not require an upfront exchange of funds, but almost always requires a payment at maturity to settle the asset or liability position of the contract.

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 purchased option begins its life as an asset in the amount of the option premium paid to the counterparty at inception, and will expire with either a positive value or zero fair value. In other words, options require an upfront payment, but do not require the option holder to make a payment at maturity.

A zero cost collar is a combination of two vanilla options, whereby the premium paid on the purchased option is offset by the premium received from the sold option to create a zero cash outlay. This structure enables the holder to buy or sell a quantity of a particular currency within a specified range of exchange rates between the two option strikes on or before a pre-arranged date. In turn, collars do not require an upfront exchange of funds, but may require payment at maturity if the structure finishes in an asset or liability position.

The two key credit variables to consider are (1) the upfront exchanges of funds and (2) the obligation to make a payment at maturity. Since a forward contract is a firm obligation for a future settlement to be made with no upfront exchange of funds, this derivative has a higher credit risk than a purchased option where upfront premium is paid and there is no obligation for the option holder to make a payment at maturity. Similarly, since a collar may require a payment at maturity to settle the contract, collars are more credit intensive than vanilla options.

Conterparty credit risk became a prominent headline during the financial crisis of 2007–2008, and remains an important factor to consider as credit limits may prohibit a firm or entity from entering into a derivative transaction, particularly in a tight credit economy. When credit constraints inhibit business decisions, firms may need to consider alternative means to transact such as posting collateral. When trading FX derivatives, the acronym KYC, which traditionally stands for Know Your Customer, can be modified to Know Your Counterparty.

If you are interested in learning more about foreign exchange derivatives, credit considerations, and how to hedge using financial instruments, sign up for FX Initiative’s Currency Risk Management Training today. Our educational videos, interactive examples, and webinar events use real world companies such as Apple, Inc. to illustrate aspects of their world class foreign exchange risk management policies and procedures. Mitigating currency risk is a top priority for global businesses, and you can benefit your firm’s bottom line by taking the FX Initiative!

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The FX Initiative Team
support@fxinitiative.com