Practical Example:
You have on your foreign currency account
a receivable in EUR for which you get 0,5% interest. At the same time you
have a payable in CHF for which you have to pay 6,5% current account
interest. You need the EUR in 1 month to pay an invoice and you don't like
to sell the CHF vs. the EUR to avoid a currency exposure. At a rate of
1.66 for 1/2 mio EUR you have to pay net CHF 4'150.-
Improvement
possibility:
Change the EUR into
CHF for the time of 1 month with a currency swap. Because the EUR interest
is higher than the CHF interest, you get following offer from your Bank:
Sell EUR/CHF at 1.66 and buy it back in 1 month at 1.6573. The netresult
is now a gain of CHF 2'800.- (- opportunity interest EUR + loss of
CHF interest - exchange rate difference) instead of a loss of
4'150.-.
Differend kind of approaches limit the goal of
currency- and interestmanagement to the individual hedging of a specific
cash-flow in the future to minimize currency- or interesteffects. But by
hedging = freezing a currency- or interestrate you also loose the
possibility of gains. Therefore the key-question is:
Does the Risk control us or do we control the Risk?
-
Qualify the Risk (Export / Import / Financing / Profit)
-
Quantifiy the Risk (Total Risk is e.g. USD 20'000)
-
Control the Risk and use Chances (Riskpotential vs. Value at Risk)
Only after these steps are
established consequently it is possible to decide which instruments are best for
hedging. This could be Money-Market-, Forward-, Options or other Hedges. Be
aware of IAS 39 if you report according IFRS, there are special requirements to
monitor and control these hedges.
Stragegy
Basis of every doing should be, at least
in the foreign exchange and interest makret, to decide rational and think
strategical. Therefore we recommend before doing any hedging first to find
out what the potential of natural hedging is and then figure out the
absolute 0-point. This is the point where exchange- and interest rates
break the critical threshold of bringing the company into a dangerous
situation. Such a hedging on this threshold shall be always 100% and of
course, should cost nearly nothing.
Everything above this
critical threshold, i.e. worst case scenario, shall be individually
analysed and hedged.
We are pleased to inform you
how you can implement successfully and sustainable such a strategy.
Legal
In general most legal institutions like
governments or SEC does not require that you hedge your fx- or interest
risks: But: every company has the strong obligation to do
everything to avoid bankruptcy. Basicly all members of the top management
like the CEO and CFO, in some cases also the Treasurer can be made
responsible for such a damage. We are pleased to figure out for you what
these risks are for your company.
Reasons for hedging or coordination of Currency- and Interest
exposures
