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!

Attend the Net Investment Hedging webinar!

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

Explore the powerful impact of professional development

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 customer success.

FX Initiative's approach to professional development focuses on the employee first, and makes results personal and meaningful. 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 dedicating time to the learning process and practicing what you've learned, it seems unrealistic to expect positive bottom line results and achievement of 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. 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. 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 an actionable and valuable 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 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 necessity for global companies and their employees to remain competitive and profitable.

Ready to invest in professional development for your organization? Click here to take the FX Initiative!

Cheers,

The FX Initiative Team
support@fxinitiative.com

Attend the FX Risk Management webinar!

Program Overview This FX Risk Management webinar will address the fundamentals of corporate foreign exchange (FX) risk management. We begin with an overview of how leading multinational corporations manage foreign exchange risk. We will then address how FX risk impacts a corporation’s financial statements, including the Income Statement and Balance Sheet, and we will also highlight common disclosures found in annual reports (10-K). Furthermore, we’ll examine key terminology related to FX risk management, and define terms such as FX transaction, translation and economic risk. Finally, we will look at the essential elements of a world class corporate FX risk management program, with a focus on personnel, operations, resources, and policy. The goal of this program is to help global corporations understand the importance of FX risk management and how to assess their foreign exchange risk profile using a structured analysis framework. Learning Objectives Discover how leading multinational corporations manage foreign exchange (FX) risk. Explore FX risks on the Income Statement, Balance Sheet, and in annual reports (10-K). Recognize common FX terminology such as transaction, translation and economic risk. Identify essential elements of a world class corporate FX risk management program.   Who Should Attend? New and seasoned finance, accounting, treasury, and related professionals (CPA, CIA, CRMA, CFE, etc.) interested in international business. We look forward to your participation in this live program on Thursday, April 26 2018. Simply click here to register for the presentation! Register

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

Find Out the 4 Ways Firms Manage FX Risk

Operationally, foreign exchange risk can be managed in four ways: (1) Avoided, (2) Transferred, (3) Retained and (4) Reduced. Each of these four methods can be applied individually or collectively, and there is no standard protocol on which approach to use when conducting international business. Therefore, companies can benefit from defining and exploring examples of how each approach works in practice as follows:

First, avoiding foreign exchange risk refers to engaging only in domestic business opportunities where both parties to every transaction use the same functional currency. For example, a company based in the United States that uses the U.S. dollar (USD) as their functional currency would only conduct business with counterparties that also use the U.S. dollar as their functional currency. As a result, neither party to the transaction is exposed to foreign exchange risk, but this approach severly limits business opportunities internationally.

Second, transferring foreign exchange risk refers to pricing transactions in the company’s functional currency rather than the customer’s local currency or through risk sharing agreements where a portion of the risk is shared. For example, a company based in the United Kingdom that sells to American consumers could price their goods and services in British pound sterling (GBP). In turn, the foreign exchange risk is transferred to the consumer, but this approach creates a barrier to closing sales in the United States since customers must first acquire GBP to make a purchase.

Third, retaining foreign exchange risk refers to accepting the risk associated with foreign exchange transactions and bearing the potential volatility that accompanies market fluctuations. For example, a Canadian company that does business in the United States where transactions are denominated in U.S. dollars is exposed to exchange rate fluctuations. Consequently, the amount of Canadian dollars (CAD) required for the company to settle a transaction varies, which can create uncertainty and volatility in earnings and cash flows.

Fourth, reducing foreign exchange risk refers to structuring deals strategically through deliberately denominating transactions in a particular currency and hedging the associated foreign exchange risk. For example, a Japanese company that sells automobiles to the United States that are denominated in U.S. dollars can enter into a currency derivative to hedge the U.S. dollar (USD) / Japanese yen (JPY) exchange rate. Accordingly, this approach ensures that the amount of JPY required to settle a future transaction is predictable and certain.

Overall, world-class foreign exchange risk management involves a combination of risk retention and reduction. Risk retention involves controlling the risk and accepting the gain or loss, and risk reduction involves mitigating the risk to an acceptable level by understanding when and how to hedge using financial instruments. FX Initiative’s currency risk management training outlines best practices related to risk retention and risk reduction techniques, including easy to follow guidelines for pricing and booking transactions.

Which approaches to managing foreign exchange risk does your global business employ? Our foreign exchange risk management training can help you optimize several important aspects of your program such as accounting booking rate conventions, exchange rate sources, and currency denomination parameters. Start the new quarter with an actionable plan for managing foreign exchange risk by taking the FX Initiative today!

Ready to retain and reduce your FX risk exposures? Click here to get started!

Cheers,

The FX Initiative Team
support@fxinitiative.com

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!