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FX Risk Management

It is not uncommon to find companies using out-dated approaches to manage their currency risk while their business has evolved. We recommend that our clients closely examine the risks they face and their tactical approach by following a recommended currency risk management framework. The currency risk management framework can be broken down into six key stages. We help clients identify their strengths and weakness in each stage before determining a clear action plan.

currency risk management workflow
1. Risk Identification
An analysis of cash flow forecasts and historical data will be performed in order to determine the size of the true foreign exchange risk.

2. Risk Measurement
Potential impacts of your company’s FX risk can be reviewed and quantified using specific modeling techniques. The analysis will clearly demonstrate the impact of FX risk on your entity’s cash flow and or profitability.

3. Risk Management and Objectives
To develop a currency risk management strategy the client must clearly specify the risk management objective(s) that will guide any hedging / trading decisions. We will then consider a number of alternative strategies to achieve these objectives. These strategies are “back tested” using regression/historical analysis to ensure that the risk management objectives are met and remain consistent with any guidelines provided by you the client.

4. Risk Management Process
Our approach will ensure compliance with your broader Treasury guidelines, including budget constraints or accounting limitations. Inclusive of any accounting issues, we assist you in achieving your core risk management objectives, while ensuring that the program remains compliant within the broader management framework. In determining the approaches and strategy, Klarity will offer guidance on industry best practices and recommendations that would be applicable for hedge accounting treatment wherever possible.

5. Strategy Execution
Once a strategy has been determined, we assist in its implemention. On an ongoing basis Klarity will provide capital market information to help determine appropriate execution and FX instrument selection. We also assist in comparing and negotiating FX pricing and designing tailored structured products as required.

6. Benchmarking & Analysis
Klarity provides ongoing reporting to measure the performance of the FX program, ensuring that the objectives of the currency risk management approach are being met. Regular feedback is used to positively iterate the process and allow for adequate flexibility to market conditions.