Common Challenges to Hedging FX Risk Chatham Financial White Papers – October 2015 Early 2015 ushered in currency volatility and dollar strength unseen in decades. Every day, new headlines of companies negatively impacted by large exchange rate movements greeted readers of financial news. Earnings calls are littered with references to “constant currency” impacts and earnings forecast reductions driven by significant currency movements. With this background, analysts, investors, Board Members and senior management have asked, “What is stopping us from hedging our risk more effectively?” This article will cover three key hurdles that companies face when crafting and maintaining currency hedging programs: Data, Design, and Accounting.

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Pensions & Investments: FX scandal’s lessons for asset owners By Peter Ahlin & Luke Zubrod August 14, 2015 “The foreign exchange manipulation scandal involving major global banks demonstrates that at their core, currency conversions are not merely operational processes. They are significant drivers of value that must be carefully managed. Pension boards and investment managers should undertake to ensure their FX spot execution practices are designed to preserve and protect this value.”Read More

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Eight days after the Super Bowl, NFL fans worldwide are still talking about that play call. With 2nd and goal at the Patriots one-yard-line, trailing 28-24 with less than a minute on the clock, the Seahawks had strong alternatives at their disposal. Their powerful running back Marshawn Lynch, nicknamed Beast Mode for his ability to run through would-be tacklers, had bulldozed to more than 100 yards in the game already. Their ever-elusive quarterback Russell Wilson had slipped through the fingers of blitzing defenders more than once. Run a single yard, and their opponents would fall behind with less than thirty seconds to kick a game-tying field goal. Instead, the Seattle coaching staff stunningly selected a slant pass to their wide receiver, Ricardo Lockette, whose route would take him straight into the heart of the densely-concentrated Patriots run-stopping defense. The pass…

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Every time we run to the grocery store or pharmacy for household staples like baking soda or ibuprofen, we’re faced with a choice – to buy the name brand or the store brand. On the one hand, there’s something reassuring about purchasing a nationally-recognized brand; after all, if they can afford to advertise during the Super Bowl, surely they must have a quality product! On the other hand, why should we pay three times the amount for cough syrup when the store brand has the exact same list of ingredients? In truth, we often use brand recognition as a proxy for quality, whether or not that conclusion is valid. If we consumers had perfect information, we would only buy name brands if the cost premium were clearly justified by higher quality or value. This implies that subject-matter experts, such as…

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Corporate Case Study: Tracking & Reporting for Hedges Our Client: A global musical instruments manufacturer and distributor who actively manages FX and interest rate risk exposures. Situation: The company was managing over 1,500 derivative instruments in Excel and was applying hedge accounting for more than half of their derivatives portfolio. They were applying a hedge accounting methodology that caused some earnings volatility and wanted to evaluate whether another approach, such as regression for effectiveness assessment and hypothetical derivative method for measurement, could produce better results. The period end process was taking longer than our client wanted, and, unfortunately, it was necessary to enter and maintain every derivative into multiple systems or spreadsheets. The company was seeking to implement a hedging, hedge accounting & derivative reporting solution that would: Ease the administrative burden of tracking and reporting derivative transactions Eliminate risk…

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VIDEO: ChathamDirect Michael Bontrager and others from Chatham Financial involved in the project describe why ChathamDirect was developed and what client needs it meets in managing risk. A full transcription of the video is available below, but you can view the video here: CHATHAM – DIRECTOR’S CUT – FINAL // // Video Transcript: Mike Bontrager: For years, Chatham has been known as an advisory company but what people don’t know is we’re also a technology company and we’ve been for years. What we really believe is that we can bring advisory and technology together just to produce solutions in the markets that are just second to none. Amol Dhargalkar: CFOs have been dealing with volatility in their businesses since the beginning of time. Chatham has really been working with them to help them mitigate that volatility in the interest rate,…

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As a global financial advisory services and technology solutions firm, Chatham Financial specializes in the debt and derivatives markets. Our solutions serve the investment and risk management needs of clients across a spectrum of industries and markets. As such, we have offices in the United States, Europe, Asia and Australia. Through our blend of expert advisory services and proven technologies, we enable companies to develop effective financial strategies and successfully execute programs that optimize their business goals. Founded by Mike Bontrager in 1991, Chatham is an employee-owned, independent market leader. Our global team of capital markets experts, risk management advisors, CPAs, lawyers, quantitative analysts, and technology developers serve more than 2,500 clients annually. As a purpose-driven organization, we are committed to making a positive impact for our clients, our associates, our communities, and the capital markets at large. We are…

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Mitigating risk and avoiding dead deal costs When a private equity investor agrees to purchase a company in a foreign currency rather than the currency in which the debt or equity is funded (e.g. investing equity from a US Dollar denominated fund in a JPY asset or raising debt in USD for a CAD investment), the fund runs the risk that, prior to closing, foreign exchange (FX) rate movements will require additional funding. Many investors prefer to lock in the specific equity check required at the time of signing to avoid any surprises at closing. Deal contingent FX hedging allows investors to lock in a specific FX rate. It also allows them to walk away with no strings if the underlying deal does not close. Similarly, the high amount of leverage in these deals also prompts investors to take advantage…

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Optimal management of large and complex debt and derivative portfolios As infrastructure portfolios grow, so do the challenges of managing them. In recent years, such challenges are compounded by more diversified debt terms and increased regulatory requirements, including trade reporting and portfolio reconciliation. In addition, derivatives have a heightened reputation for risk. The resulting increased investor and regulatory scrutiny require even more robust transaction recording, valuation, and monitoring. How Chatham supports your risk management needs Chatham’s advisory services combined with accounting-compliant debt and derivative valuations technology are specifically built around equity sponsor requirements. This approach is unique from the majority of advisory-only firms and pure technology providers. And, it forms the basis of a range of services, which may be tailored to these requirements: Central repository of debt and derivative economics and documentation Derivatives valuations, including accounting-compliant CVAs Derivatives accounting…

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Foreign Currency Hedging for Corporates As companies expand globally, currency risk can significantly impact both operational results and financial statements. This can stem from mismatching revenue and expense currencies, managing various operational currencies under the same corporate umbrella, or even short-term liquidity needs in particular currencies. Oftentimes, companies may seek out economic exposure to a particular region through investments in assets or operations while also seeking to reduce earnings volatility caused by currency fluctuations. This, in turn, can impact financial reporting results or present real economic risk to the financial stability of the company. That is why multinationals are increasingly focused on quantifying exposure and sensitivity, driving efficiency in hedging programs, and achieving preferred hedge accounting treatment for FX risk management programs. Benefits of Chatham Foreign Currency Risk Management Solutions Practical Impact and Ongoing Support: Whether it’s evaluating a specific…

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