Mapping Currencies Across Countries

Mapping Currencies Across Countries: It is evident that no one single world currency exists. There are over 180 currencies recognized as legal tender in circulation throughout the world. The most widely used list of currencies is known as ISO 4217, which is a standard published by the International Organization for Standardization or the ISO. The ISO is an international standard-setting body composed of representatives from various national standards organizations, and the ISO 4217 currency codes shown in this interactive map are used in banking and business globally.

While many of us are familiar with the “Major” currencies, which include the euro, British pound sterling, Australian dollar, New Zealand dollar, United States dollar, Canadian dollar, Swiss franc, and Japanese yen, there are so many more currencies to explore. This interactive map helps you explore the world through the lens of currency. All 180 currencies in circulation are mapped using geographic coordinates and ISO 4217 currency codes. Simply click on the dots on the map to reveal the ISO 4217 currency code, currency name, country.

To learn more about conquering currency risk, 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.

FX Initiative: Your FX Risk Management Formula [𝑓𝑥+𝐶𝑃𝐸=𝑓𝑥𝐶𝑃𝐸.𝑐𝑜𝑚]

Are your finance, accounting and treasury teams ready to manage foreign exchange (FX) risk in 2019? Whether you are new to foreign exchange or a seasoned professional, follow FX Initiative for your FX risk management formula to optimize an actionable plan for managing currency risk.

FX Initiative is a leading provider of FX risk management training to finance, accounting and treasury professionals through educational videos, online tools, and webinar topics that are eligible for continuing professional education (CPE) credit and offered on-demand anytime and anywhere at FXCPE.com. Our training approach starts by identifying knowledge gaps using our Pre-Test Evaluation, and then closing those knowledge gaps with our on-demand educational videos, real-world examples, and live and recorded webinar events to create a comprehensive curriculum on currency risk management.

The organizations FX Initiative works with recognize the value of investing in training that enables employees to excel at their job responsibilities, and apply their professional development and knowledge for the benefit of the firm. We teach best practices for reducing FX gains and losses, preserving cash flows, and optimizing FX risk management strategies for revenues, expenses, receivables, payables, assets, liabilities, and equity. The benefit to the bottom line and increased understanding and communication of FX challenges and solutions is brought about through the following four essential stages of learning:

First, we ask challenging and critical questions global firms face, such as:

• How to manage currency risk?
• How to draft a FX risk policy?
• Where to look for FX risk exposures?
• What currency risks to hedge and how?
• Which strategies meet FX hedge objectives?
• What is the economic and accounting impact?

Second, we answer those questions in our CPE video courses, which include:

1. FX Market Overview
2. FX Risk Exposures
3. FX Risk Management
4. FX Spot & Derivatives
5. Hedging FX Transactions
6. Hedging Foreign Subsidiaries

Third, we reinforce concepts with CPE exams and interactive examples using our:

• Currency Code Locator
• FX Risk Policy Drafter
• FX Derivative Speculator
• FX Transaction Simulator
• FX Subsidiary Consolidator

Fourth, we present hands-on practical CPE webinars that cover the following topics:

1. FX Risk Management
2. FX Risk Policy
3. FX Forward Contracts
4. Balance Sheet Hedging
5. Cash Flow Hedging
6. Net Investment Hedging

Our approach ensures that topics are not only addressed in detail, but reinforced and practiced, enhancing confidence in your ability to implement and expand on your newly improved skills. All training content is available 24/7 365 to help you anytime and anywhere with FX risk policies, FX accounting, FX hedging strategies, and everything FX risk management related.  FX Initiative serves as a trusted partner and FX risk management resource to finance, accounting and treasury professionals with the goal of increasing collaboration and profitability.

Are you ready to manage FX risk?  Become a FX Initiative subscriber today to access our complete suite of foreign exchange (FX) continuing professional education (CPE), examples and events at FXCPE.com. Managing FX risk is a high priority for many firms in 2019, and it is now easier than ever to learn the fundamentals of currency risk management. You can reduce FX risk and reap rewards abroad by taking the FX Initiative for your international business today!

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Cheers to your continued success in the new year,

The FX Initiative Team
support@fxinitiative.com

Happy Holidays from FX Initiative!

On behalf of FX Initiative - we thank you for your support, and wish you a happy holiday season and prosperous new year!

How to Price Cryptocurrency (Bitcoin) Derivatives?

Bitcoin (BTC) broke through to a record high of $11,831 over the weekend as volatility in the cryptocurrency continues to rise. Amidst these large and recent price fluctuations, the CME Group (Chicago Mercantile Exchange & Chicago Board of Trade) announced that its new bitcoin futures contract will be available for trading on December 18, 2017. While the valuation of traditional currency and equity derivatives is well established among professionals working in the financial industry, the introduction of the first cryptocurrency bitcoin derivative poses valuation questions as it relates to a new pricing model. Simply put, how are cryptocurrency derivatives priced?

Financial engineering is a continuously evolving discipline designed to introduce and test new products, pricing models and hypotheses. Currently, equity futures are typically priced using variables such and the risk free interest rate and dividends, and currency forwards are priced based on the foreign and domestic interest rate differential between the two currencies in the pair. Additionally, equity options are typically priced using the Black–Scholes option pricing model, and currency options are priced using the Garman–Kohlhagen option pricing model. All of these equations take into account variables such as dividends and/or interest rates.

However, bitcoin as an asset class does not pay dividends nor is it tied to a specific risk free, domestic or foreign interest rate. As a result, a new or modified version of a derivative pricing model for cryptocurrency that accounts for the unique nature of this new digital asset class will likely be used to value the first bitcoin futures contracts. Many academics and practitioners are sharing their thoughts on the best approach for pricing bitcoin derivatives. A couple of commonly raised questions include: (1) How are dividends removed from the traditional pricing models? and (2) What interest rate(s) should be used? As the financial industry navigates a new frontier with cryptocurrency and blockchain technology, how do you think bitcoin derivatives should be priced?

Ready to learn more about currency and derivatives? Click here to take the FX Initiative today!

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:

.

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!

Due Diligence & Distinguishing FX Derivatives

Due diligence is a term that commonly applies to a business investigation, and it contributes significantly to informed decision making by assessing the costs, benefits, and risks of a transaction. As due diligence relates to foreign exchange (FX) risk management, firms can enhance their strategic decision making process by assessing the costs, benefits, and risks associated with currency derivatives, and recognizing their differences and similarities when hedging foreign currency transactions.

At the highest level, currency derivatives are financial contracts between two parties whose value is derived from the exchange rate of one or more underlying currencies. FX risk management involves mitigating currency risk to an acceptable level by understanding when and how to hedge using FX derivatives to achieve FX objectives. The first part of the FX risk management decision making process is determining a firm’s FX hedging objectives and strategy for achieving those objectives.

The two most common FX risk management hedging objectives are (1) minimizing foreign exchange gains and losses in earnings and (2) preserving cash flows. The most common currency derivatives used in practice are (1) forward contracts, (2) vanilla options, and (3) zero cost collars. Therefore, to achieve the 2 most common hedging objectives using the 3 most common currency derivatives, it is helpful to compare and contrast how each derivative achieves each hedging objective as follows:

1) Forward Contracts

• Objective 1: Minimizing Earnings Volatility - Forwards are particularly attractive for firms that seek a symmetrical payoff profile relative to the spot foreign exchange rate, where the hedge achieves largely equal and offsetting gains and losses related to the underlying foreign exchange exposure. Forwards are by far the most effective derivative for eliminating foreign exchange gains and losses to the greatest extent possible, and are used overwhelmingly in practice for all types of FX hedges.
• Objective 2: Preserving Cash Flows - Forward contracts do not require an upfront premium to be paid, unlike an option. However, a forward contract will almost always finish in either an asset or liability position at maturity depending on the ending spot rate, which may require a cash payment to be made in the future to settle the contract.
• 3 Distinguishing Characteristics: 3 key distinguishing characteristics of forward contracts are their forward point premium or discount, the lack of upfront cost, and the symmetrical payoff profile relative to the spot foreign exchange rate.

2) Option Contracts

• Objective 1: Minimizing Earnings Volatility - Options are particularly attractive for firms that seek an asymmetrical payoff profile relative to the spot foreign exchange rate, where the hedge secures the value of an underlying position against unfavorable market moves beyond the strike rate, while retaining 100% participation in favorable market moves. Options do not provide the same degree of offset in earnings as a forward due to its asymmetrical payoff profile, and tend to be used for longer dated and/or uncertain exposures.
• Objective 2: Preserving Cash Flows - A purchased vanilla option requires a cash premium to be paid to the counterparty at inception, which can be a deterrent compared to a forward contract. However, an option will always expire with either a positive intrinsic value or zero fair value at maturity, ensuring no future cash payment is required by the option holder to settle the contract.
• 3 Distinguishing Characteristics: 3 key distinguishing characteristics of vanilla option contracts are the premium paid upfront, the asymmetrical payoff profile relative to the spot foreign exchange rate, and the lack of obligation to make a payment at maturity.

3) Zero Cost Collars

• Objective 1: Minimizing Earnings Volatility - Zero cost collars are particularly attractive for firms that seek to establish a predefined range of foreign exchange rates where the value of the hedged FX transaction is secured on the downside by the collar “floor” and limited to the upside by the collar “ceiling" or "cap”. Zero cost collars provide less downside protection and less of an offset in earnings relative to a forward contract, but allow for participation in favorable market moves like an option contract with no upfront premium.
• Objective 2: Preserving Cash Flows - Zero cost collars do not require an upfront premium to be paid by combining two vanilla options, (1) a purchased out of the money option and (2) a sold out of the money option, whereby the premium paid on the purchased option is offset by the premium received from the sold option to create a zero cash outlay. However, a collar has the potential to finish in a zero fair value, asset or liability position at maturity, which may require a future cash payment to be made to settle the contract.
• 3 Distinguishing Characteristics: 3 key distinguishing characteristics of zero cost collars are the ability to participate in favorable foreign exchange rate movements with no upfront cost, the reduced downside protection relative to a forward contract, and the unique payoff profile of the collar range relative to the spot foreign exchange rate.

Overall, each company must decide their FX hedging objectives and strategy for achieving those objectives that balances minimizing earnings volatility and preserving cash flows. There is no one prescribed method for selecting a FX derivative, and firms can benefit by approaching the selection of a derivative from a hedge objective perspective. As the late, great economist Milton Friedman said, “there is no free lunch” in economics, and when selecting a FX strategy, firms can benefit from recognizing the tradeoffs, differences and similarities of how the 3 most common currency derivatives can be used to achieve the 2 most common FX hedging objectives.

To learn more about FX derivatives, you can explore our previous blog post on “How to Compare Currency Derivatives & Credit Considerations” and sign up for FX Initiative’s currency risk management training. Our FX Spot & Derivatives Course deconstructs forward contracts, option contracts, and zero cost collars to help you select an optimal hedge instrument. Additionally, our FX Derivative Speculator illustrates the economics and accounting of derivative positions to compare and contrast the payoff profiles, cash flows and accounting entries under virtually any FX rate scenario. Start doing your derivative due diligence today by taking the FX Initiative!

Are you curious how forwards, options, and zero cost collars work in practice? Click here to learn from real-world examples!

Cheers,

The FX Initiative Team
support@fxinitiative.com

Balancing Brexit & FX Balance Sheet Hedging

As Brexit continues to capture news headlines, FX Initiative is increasingly helping North American companies manage the currency risk associated with doing business in the United Kingdom (UK). Brexit refers to the prospective withdrawal of the United Kingdom from the European Union (EU), which was voted on in June of 2016. Since the referendum, the value of the British pound (GBP) versus the US dollar (USD) has fluctuated from highs near 1.4500 levels in June of 2016 to lows near 1.2000 levels in January of 2017. This approximate 15% decline in value has prompted many international companies to adapt their foreign exchange (FX) hedging programs to better stabilize earnings and preserve cash flows.

American companies exporting to the United Kingdom have seen significant fluctuations in their GBP denominated revenues and accounts receivables (A/R), which are translated into USD in their financial statements for accounting purposes. To state the obvious, the 15% fluctuation in GBP/USD exchange rates over a 15 month period has created sizable swings in earnings and cash flows for firms that operate with a non-GBP functional currency. To mitigate this volatility, one major US pharmaceutical company needed to reconsider their FX balance sheet hedge program to better respond to the changing political landscape and unpredictable currency market prices.

Balance sheet hedging is by far the most common approach among multinational corporations when hedging foreign exchange risk, and in the context of Brexit, refers to hedging GBP denominated receivables and payables on the balance sheet as part of a systematic hedge program at each period or month end, or upon booking a material foreign currency denominated transaction. This US pharmaceutical company was previously hedging at each month end to adjust and match the amount of the their underlying GBP receivables with the amount of their GBP forward contract hedges. However, the majority of their monthly receivable bookings occurred on the 15th of each month, and their mid-month A/R bookings were largely unhedged from the middle of the month through month end.

To address this problem, FX Initiative helped assess the mechanics of their balance sheet hedge program by looking at their financial reporting process and specifically at their accounting booking convention. An accounting booking convention refers to the foreign exchange rate used to record a transaction on the financial statements. In this case, they were using the daily spot rate, which meant they were exposed to changes in exchange rates for each mid-month booking of a material GBP receivable transaction. By probing all the way down to the accounting booking convention, this US company was able to quickly and effectively enhance their balance sheet hedge program by adding one additional “true-up” hedge mid-month.

Their revised approach meant that rather than only hedging at the end of each month, the company was now adjusting the amounts on their forward contract hedge both mid-month and at month end. The result of this fundamental fix was that the company is now hedging over 90% of their GBP exposure for the entire month, and the FX swings in their monthly and quarterly earnings have declined by over 50%. Regardless of whether you are a FX risk management expert or novice, knowing where to diagnose a FX exposure is critical and having the ability to drill down to a technical level of detail such as an accounting booking convention can help companies conquer currency market challenges more efficiently and effectively.

FX Initiative’s training and consulting services can help your global organization establish and improve your foreign exchange balance sheet hedge program. We use real-world examples from Apple to demonstrate how a balance sheet hedge works in practice, and our risk modeling tools enable you to practice your approach prior to implementation to get comfortable with the economics and accounting. While events like Brexit are hard to predict, a consistent and ongoing foreign exchange risk management program can proactively protect against changing political, regulatory, and economic environments. FX hedging is about making the outcome more certain, so give your company the FX certainty and predictably it needs to succeed abroad by taking the FX Initiative!

Ready to build a better FX balance sheet hedge program? Click here to start your Currency Risk Management training!

Cheers,

The FX Initiative Team
support@fxinitiative.com

Download the PDF Brochure to learn about FX Initiative!

Are you curious how FX Initiative can help you with currency risk management? Download the PDF brochure and learn why Fortune 500 companies, small and medium sized enterprises (SME), and sales teams of financial institutions trust FX Initiative to learn foreign exchange best practices.

For over a decade, we’ve been training Fortune 500 companies, global businesses, treasury professionals, and FX sales teams on foreign exchange risk management best practices. While all client’s had different objectives and challenges, all benefited from the unparalleled foreign exchange (FX) and continuing professional education (CPE) resources FX Initiative’s currency risk management training provides created by industry expert & trainer Evan Mahoney, CPA. Whether you’re new to foreign exchange or a seasoned professional, your questions will be answered, your challenges will be addressed, and you will leave with an actionable plan for managing currency risk.

Download the PDF Brochure

Self-Study currency risk management training with Evan Mahoney is the gold standard for meeting your organization’s professional development needs. Live webinar sessions that are fully customized can be added to enhance your learning experience and address and solve company specific challenges. Evan has a passion for teaching that shines through in his recorded presentations and live events alike. Evan’s training is so effective that over 90% of trainees went from scoring less than <70% on the Pre-Training Evaluation to earning a perfect 100% score post-training. Not only does this show the growth in knowledge each student experiences, but it leaves a lasting foundation of information to access daily. Our best source of new clients comes from satisfied customers that have benefited directly from our Currency Risk Management Training. You can take full advantage by combining self-study training and customized live webinars to ensure your organization has the resources needed to optimize and mitigate FX risk. Our training is accessible globally and available around the clock to meet your needs.

Evan Mahoney has over a decade of foreign exchange experience, and has helped hundreds of companies identify, assess, and mitigate foreign exchange risk. Evan’s strong finance and accounting background offers a unique skill set for solving technical strategy, policy, and financial reporting challenges in a manner that allows clients to understand and address their currency risk management issues at hand. Evan is an experienced practitioner and established thought leader available to service your organizations’ ongoing currency risk management training and professional development needs. Want to discuss Currency Risk Management Training with Evan Mahoney? Call 312-566-7475 or email evan.mahoney@fxinitiative.com today!

Ready to take the FX Initiative? Click here to get started!

Cheers,

The FX Initiative Team
support@fxinitiative.com