Currency-, Commodity and Interest-Hedging
Acknowledge the risk and manage it!
Risk in currencies, commodities or interest are denominated in absolute amounts of outstanding receivables and payables which are subject of
currency-, commodity- or interestrate movements. The risk on this exposure arise through uncertainty about the future of movements in foreign
exchange- or interestrates, i.e. the price-risk.
Risks, also called exposures, can be transactional (physicle transactions in the future), translational (out of translations) or economical
(transactions, for which the occurance is not likely or safely known) .
Example:
You have on your foreign exchange account a recievable
in EUR for which you get 0,50% 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, hence you don't like to sell the
CHF vs. the EUR to avoid a currency exposure. At a rate
of 1.25 for 1/2 mio EUR you have to pay net CHF 3’125.-
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 1.25 spot and buy it back in 1 month at
1.2488. The netresult is now a gain of CHF 600.- (-
opportunity interest EUR + loss of CHF interest - exchange
rate difference) instead of a loss of 3’125.-.
Differend kind of approaches limit the goal of currency-, commodity- and interestmanagement to the individual hedging of a specific cash-flow in
the future to minimize currency- or interesteffects. But by hedging, i.e. freezing a currency-, commodity or interest price you also loose the
possibility of gains. Therefore the key-question is
Does the Risk control us or do we control the Risk?
1.
Qualify the Risk (Export / Import / Financing / Profit)
2.
Quantify the Risk (Total Risk is e.g. USD 10'000)
3.
Manage the Risk and use Chances (Riskpotential vs. Value at Risk)
Only after these steps are consequently introduced it is possible to decide which instruments are best dedicated for hedging. This could be
Money-Market-, Forward-, Options-, Commodity or other Hedges. Be aware of IAS 39 if you report according IFRS, there are special
requirements to monitor and control these hedges. Reference is made to Hedge Accounting.
Strategy
Basis of every action should be, at least in the foreign exchange, commodity and interest makret, to decide rational and think strategical.
Therefore we recommend before doing any hedging first to find out what is the potential of natural hedging and then figure out the absolute 0-
base. This is the point where exchange-, commodity and interest prices brake 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
Basically most legal institutions like governments or SEC does not require that you hedge your fx-, commodity or interest risks: But: every
company has the strong obligation doing 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 a hedge or coordination of currency- and interest rate risks
•
Minimize negative risk (n.b.: risk can be also positive, can be found out in stress-tests, see also stress test in our treasury software),
•
Avoid interest costs
•
Better and safer calculation of sales prices,
•
Advantages in competition versus competitors,
•
Short-, mid- and longterm financial and liquidity planning,
•
Secure the Existence!
Read more about this important topic here in our news-corner.
currency-, commodity- or interestrate movements. The risk on this exposure arise through uncertainty about the future of movements in foreign
exchange- or interestrates, i.e. the price-risk.
Risks, also called exposures, can be transactional (physicle transactions in the future), translational (out of translations) or economical
(transactions, for which the occurance is not likely or safely known) .
Example:
You have on your foreign exchange account a recievable
in EUR for which you get 0,50% 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, hence you don't like to sell the
CHF vs. the EUR to avoid a currency exposure. At a rate
of 1.25 for 1/2 mio EUR you have to pay net CHF 3’125.-
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 1.25 spot and buy it back in 1 month at
1.2488. The netresult is now a gain of CHF 600.- (-
opportunity interest EUR + loss of CHF interest - exchange
rate difference) instead of a loss of 3’125.-.
Differend kind of approaches limit the goal of currency-, commodity- and interestmanagement to the individual hedging of a specific cash-flow in
the future to minimize currency- or interesteffects. But by hedging, i.e. freezing a currency-, commodity or interest price you also loose the
possibility of gains. Therefore the key-question is
Does the Risk control us or do we control the Risk?
1.
Qualify the Risk (Export / Import / Financing / Profit)
2.
Quantify the Risk (Total Risk is e.g. USD 10'000)
3.
Manage the Risk and use Chances (Riskpotential vs. Value at Risk)
Only after these steps are consequently introduced it is possible to decide which instruments are best dedicated for hedging. This could be
Money-Market-, Forward-, Options-, Commodity or other Hedges. Be aware of IAS 39 if you report according IFRS, there are special
requirements to monitor and control these hedges. Reference is made to Hedge Accounting.
Strategy
Basis of every action should be, at least in the foreign exchange, commodity and interest makret, to decide rational and think strategical.
Therefore we recommend before doing any hedging first to find out what is the potential of natural hedging and then figure out the absolute 0-
base. This is the point where exchange-, commodity and interest prices brake 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
Basically most legal institutions like governments or SEC does not require that you hedge your fx-, commodity or interest risks: But: every
company has the strong obligation doing 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 a hedge or coordination of currency- and interest rate risks
•
Minimize negative risk (n.b.: risk can be also positive, can be found out in stress-tests, see also stress test in our treasury software),
•
Avoid interest costs
•
Better and safer calculation of sales prices,
•
Advantages in competition versus competitors,
•
Short-, mid- and longterm financial and liquidity planning,
•
Secure the Existence!
Read more about this important topic here in our news-corner.
Contact us, we would be glad to show you the possible opportunities!
!
Currency-, Commodity and
Interest-Hedging
Acknowledge the risk and manage it!
Risk in currencies, commodities or interest are denominated in
absolute amounts of outstanding receivables and payables which are
subject of currency-, commodity- or interestrate movements. The risk
on this exposure arise through uncertainty about the future of
movements in foreign exchange- or interestrates, i.e. the price-risk.
Risks, also called exposures, can be transactional (physicle
transactions in the future), translational (out of translations) or
economical (transactions, for which the occurance is not likely or
safely known) .
Example:
You have on your foreign exchange account a recievable in EUR for
which you get 0,50% 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, hence you don't like to
sell the CHF vs. the EUR to avoid a currency exposure. At a rate of
1.25 for 1/2 mio EUR you have to pay net CHF 3’125.-
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 1.25 spot and buy
it back in 1 month at 1.2488. The netresult is now a gain of CHF 600.-
(- opportunity interest EUR + loss of CHF interest - exchange rate
difference) instead of a loss of 3’125.-.
Differend kind of approaches limit the goal of currency-, commodity-
and interestmanagement to the individual hedging of a specific cash-
flow in the future to minimize currency- or interesteffects. But by
hedging, i.e. freezing a currency-, commodity or interest price you also
loose the possibility of gains. Therefore the key-question is
Does the Risk control us or do we control the Risk?
1.
Qualify the Risk (Export / Import / Financing / Profit)
2.
Quantify the Risk (Total Risk is e.g. USD 10'000)
3.
Manage the Risk and use Chances (Riskpotential vs. Value at
Risk)
Only after these steps are consequently introduced it is possible to
decide which instruments are best dedicated for hedging. This could
be Money-Market-, Forward-, Options-, Commodity or other Hedges.
Be aware of IAS 39 if you report according IFRS, there are special
requirements to monitor and control these hedges. Reference is made
to Hedge Accounting.
Strategy
Basis of every action should be, at least in the foreign exchange,
commodity and interest makret, to decide rational and think
strategical. Therefore we recommend before doing any hedging first
to find out what is the potential of natural hedging and then figure out
the absolute 0-base. This is the point where exchange-, commodity
and interest prices brake 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
Basically most legal institutions like governments or SEC does not
require that you hedge your fx-, commodity or interest risks: But: every
company has the strong obligation doing 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 a hedge or coordination of currency- and
interest rate risks
•
Minimize negative risk (n.b.: risk can be also positive, can be
found out in stress-tests, see also stress test in our treasury
software),
•
Avoid interest costs
•
Better and safer calculation of sales prices,
•
Advantages in competition versus competitors,
•
Short-, mid- and longterm financial and liquidity planning,
•
Secure the Existence!
Read more about this important topic here.
Contact us, we would be glad to show you the possible
opportunities!
absolute amounts of outstanding receivables and payables which are
subject of currency-, commodity- or interestrate movements. The risk
on this exposure arise through uncertainty about the future of
movements in foreign exchange- or interestrates, i.e. the price-risk.
Risks, also called exposures, can be transactional (physicle
transactions in the future), translational (out of translations) or
economical (transactions, for which the occurance is not likely or
safely known) .
Example:
You have on your foreign exchange account a recievable in EUR for
which you get 0,50% 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, hence you don't like to
sell the CHF vs. the EUR to avoid a currency exposure. At a rate of
1.25 for 1/2 mio EUR you have to pay net CHF 3’125.-
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 1.25 spot and buy
it back in 1 month at 1.2488. The netresult is now a gain of CHF 600.-
(- opportunity interest EUR + loss of CHF interest - exchange rate
difference) instead of a loss of 3’125.-.
Differend kind of approaches limit the goal of currency-, commodity-
and interestmanagement to the individual hedging of a specific cash-
flow in the future to minimize currency- or interesteffects. But by
hedging, i.e. freezing a currency-, commodity or interest price you also
loose the possibility of gains. Therefore the key-question is
Does the Risk control us or do we control the Risk?
1.
Qualify the Risk (Export / Import / Financing / Profit)
2.
Quantify the Risk (Total Risk is e.g. USD 10'000)
3.
Manage the Risk and use Chances (Riskpotential vs. Value at
Risk)
Only after these steps are consequently introduced it is possible to
decide which instruments are best dedicated for hedging. This could
be Money-Market-, Forward-, Options-, Commodity or other Hedges.
Be aware of IAS 39 if you report according IFRS, there are special
requirements to monitor and control these hedges. Reference is made
to Hedge Accounting.
Strategy
Basis of every action should be, at least in the foreign exchange,
commodity and interest makret, to decide rational and think
strategical. Therefore we recommend before doing any hedging first
to find out what is the potential of natural hedging and then figure out
the absolute 0-base. This is the point where exchange-, commodity
and interest prices brake 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
Basically most legal institutions like governments or SEC does not
require that you hedge your fx-, commodity or interest risks: But: every
company has the strong obligation doing 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 a hedge or coordination of currency- and
interest rate risks
•
Minimize negative risk (n.b.: risk can be also positive, can be
found out in stress-tests, see also stress test in our treasury
software),
•
Avoid interest costs
•
Better and safer calculation of sales prices,
•
Advantages in competition versus competitors,
•
Short-, mid- and longterm financial and liquidity planning,
•
Secure the Existence!
Read more about this important topic here.
Contact us, we would be glad to show you the possible
opportunities!
