Creating an FX hedging program
A publicly traded US-based company had recently acquired its largest supplier and wanted to proactively structure the transfer pricing agreements to facilitate centralized balance-sheet and cash-flow hedging.
Case study: Creating an FX hedging program
A publicly traded U.S.-based company had recently acquired its largest supplier and wanted to proactively structure the transfer pricing agreements to facilitate centralized balance-sheet and cash-flow hedging.
- Identify and quantify the new sources, duration and magnitude of risk stemming from the newly acquired manufacturing subsidiary
- Incorporate foreign-exchange considerations from the onset of any transfer pricing agreements between the manufacturing subsidiary and other entities
- Develop flexible, leading-practice FX risk strategies, controls and accounting documentation associated with the use of financial derivatives
- Partnered with Treasury, Procurement, and FP&A teams to aggregate all forecasted non-USD cash-flows and remeasuring monetary assets and liabilities
- Worked with Tax and Accounting teams to crystalize specific timing patterns and jurisdictional requirements for intercompany flows between entities
- Simulated the parent entity’s risk to FX G/(L), EBITDA and CAPEX stemming from the newly acquired entity within the proposed intercompany transfer agreement
- Developed a tiered implementation approach that the company deployed to immediately address short-term balance sheet risk while monitoring growth-based triggers to identify when EBITDA / CAPEX offsets no longer existed
- Provided outsourced strategy, accounting and capital market resources which enabled the company to stand-up a best-in-class risk management program with no impact on internal resources
Ready to talk about your foreign currency risk?
Schedule a meeting with an FX advisor
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.21-0191
Our featured insights
Rising rates have no brakes
Interest rate expectations increase as the Fed votes unanimously to hike the Fed funds rate by 0.75%, while the dollar continues to strengthen in line with recent market trends.
August inflation data spurs risk-off sentiment in markets
The latest U.S. CPI reading came in higher than economists expected last Tuesday, leading to sell-offs in equity markets and a resurgence of recessionary fears as the next FOMC meeting approaches.
Chatham's Q4 2022 outlook: Inflation, market volatility, and LIBOR transition
Watch Chatham's Managing Partner and Chair, Amol Dhargalkar, discuss key trends for the upcoming quarter like inflation, market volatility, and LIBOR transition.
ECB sets record rate hike
A slow economic week was highlighted by the ECB hiking interest rates by 0.75% in response to high inflation and rising energy costs. Jerome Powell reiterated the Fed’s commitment to lower inflation, while WTI and Brent prices fell for the second straight week.
Managing FX risk in a strong U.S. dollar environment
Fueled by widespread economic volatility, geopolitical uncertainty, and an increasingly hawkish Fed in the face of inflation, the U.S. dollar is the strongest it has been in 20 years. After companies became familiar with EUR-USD in the 1.20s, the currency pair has since plunged to below parity....
Oil falls amid Russian oil price cap discussions
Interest rate expectations continue to increase along with U.S. dollar strength, while oil falls as the West decides to impose a price cap on Russian oil.
FOMC will continue to raise the Fed Funds rate “until the job is done”
At his Jackson Hole speech, Federal Reserve Chair Powell indicated that the FOMC must continue to raise the Federal Funds rate and hold it at a restrictive level until it is confident inflation is under control. He specified that while the July CPI inflation reading was welcome news, it would not be enough on its own for the FOMC to change course on raising interest rates to an intentionally restrictive level.
Federal Reserve reiterates plans for rate hikes amid mixed economic data
Federal Reserve meeting minutes reiterated plans for continued rate hikes while inflation remains at higher levels. Home builder confidence dropped six points in August, falling for the eighth consecutive month, while the U.S. dollar had its best week since April 2020.