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Six key steps to implementing an operational FX program

  • jodi eppler headshot

    Authors

    Jodi Eppler

    Director
    Client Relationship Management

    Corporates | Kennett Square, PA

  • michael lombardi headshot

    Authors

    Michael Lombardi

    Director
    Client Relationship Management

    Corporates | Kennett Square, PA

Summary

Over Chatham’s 30 years serving clients, we identified six key activities for implementing a leading-practice operational FX program:

1. Identify goals and objectives

A critical first step is understanding your risk management program’s goals and objectives, as well how you will define success. You could base success on a quantitative metric (i.e., limit EBITDA impacts from FX to $X, or reduce FX G/L by Y%), a qualitative goal (i.e., leverage a technology-driven workflow to minimize manual support required), or both. Make sure to communicate and align objectives across all potential stakeholders (treasury, accounting, management, tax, business units).

2. Quantify exposure and define risk reduction targets

Before you can take steps to reduce risk, you must have a holistic view of your existing FX footprint with an understanding of the key risk drivers. What is the magnitude and direction of currency exposures? Is data available with sufficient granularity to support economic and accounting decisions? Are there any natural offsets? How volatile are the currencies? Are there correlations that you should consider? You can then quantify your portfolio risk, define your risk tolerance levels and priorities, confirm that the stated objectives can be achieved, and determine where to focus risk mitigation efforts for maximum efficiency and effectiveness.

3. Determine hedging strategy

With your exposure profile and desired targets identified, the third step involves evaluating potential hedging strategies (including hedge tenor, ratios, products, and frequency) that will best align the program with your objectives. As you evaluate alternatives, keep in mind operational requirements, hedge accounting capacity, and forecast certainty.

4. Consider accounting constraints

While economic priorities often serve as the primary driver behind a hedging strategy, you should also align the accounting results with these economic objectives. Selecting the appropriate hedge accounting approach can maximize the flexibility and capacity of a hedging program while ensuring that you minimize P&L impact — a common objective for most programs.

5. Communicate the program

Hedging programs impact a wide array of stakeholders in your organization, including treasury, FP&A, accounting, tax, legal, and business units. Clear communication across stakeholder groups, from a common understanding of risk terminology to recurring reports and expected results, can ensure your program benefits the broader organization and can respond to needs that arise from changes occurring outside of treasury.

6. Operationalize the program

Upon receiving approval on the program design and strategy, the final step involves implementing the appropriate processes and technology to operationalize your program. Leveraging best-in-class technology to automate key program workflows and integrate with your existing systems will ensure minimal operational burden and keep your team focused on value-add analysis and program results.

(Related resource: Watch the on-demand webinar, "Conducting a holistic diagnosis of your FX hedging program")

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Chatham corporate treasury advisory and hedge accounting

Chatham Financial partners with corporate treasury teams to develop and execute financial risk management strategies that align with organizational objectives. Our full range of solutions includes risk management strategy development, risk quantification, exposure management (interest rate, currency, and commodity), outsourced execution, technology solutions, and hedge accounting. We work with treasury teams to develop, evaluate, and enhance their risk management programs and to articulate the costs and benefits of strategic decisions.


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For support and guidance in developing or reviewing an FX hedging program, schedule an introductory call with our advisory team.

About the authors

  • Jodi Eppler

    Director
    Client Relationship Management

    Corporates | Kennett Square, PA

  • Michael Lombardi

    Director
    Client Relationship Management

    Corporates | Kennett Square, PA


Disclaimers

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.

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