Creating an FX hedging program
- July 2, 2021
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
SOFR: A comprehensive guide
How SOFR, the benchmark rate chosen by the ARRC to replace USD LIBOR, works and what drives its movements
Equities shake off virus jitters; ARRC talks Term SOFR
Despite a sharp selloff to start the week, the three major U.S. equity indices recovered to finish the week higher, each setting new all-time highs, as market participants focused on a strong start to the corporate earnings season and shrugged off mostly weaker-than-expected economic data and renewed fears of the COVID-19 delta variant.
European Central Bank keeps stimulus torch lit as U.S. officials consider dimming the flame
Continued upward pressure on prices in the United States remains the economic theme as the Fed signaled more appetite for gradually reducing their bond buying program. This is in contrast with the European Central Bank’s continued economic stimulus.
European debt valuation FAQs
Debt valuation is important for any entity required to report fair value. Historically, there have been different valuation policies, methodologies, and opinions making comparisons difficult and leading to inconsistency. To facilitate transparency and confidence in the valuation of institutional...
Inflation readings top expectations
The major U.S. equity indices moved lower for the week, snapping a three-week winning streak, as investors turned their attention to a slew of economic data updates and Federal Reserve Chair Powell’s semi-annual testimonies before Congress.
Inflation acceleration makes Fed uncomfortable
Inflation continued to dominate conversations with elevated CPI numbers leading to tough questions for the Fed chair at his Congressional testimony. The 2-5 year treasury yields increased but long-term yields continued to fall. Meanwhile, OPEC reached a compromise with the UAE, agreeing to higher...
Introduction of 2021 ISDA definitions and digital library
ISDA recently announced their launch of an online library (ISDA MyLibrary) to house ISDA published documentation. This platform provides users with an interactive format offering search functions, comparability tools and hyperlinks to defined terms and external resources, like educational materials.
Eri Panoti details how the FASB's recent rule proposal would benefit financial institutions
Eri Panoti spoke to Bloomberg Tax about how the FASB's new rule proposal could make financial institutions' interest rate risk management easier by expanding common accounting techniques that qualify for hedge accounting.