CURRENCY ANALYTICS - FiREapps...2002/02/18 · local resources, currency analytics solutions facilitate complete extraction of account balance data. Additionally, they provide data

CURRENCY ANALYTICSA Necessary Tool to Enhance TMS-Anchored FX Risk Management

White Paper

Copyright © 2018 Rim Tec Inc. All rights reserved. 020218 FiREapps | Currency Analytics | 2 of 17

CONTENTS

https://www.fireapps.com/

EXECUTIVE SUMMARY

Copyright © 2018 Rim Tec Inc. All rights reserved. FiREapps | Currency Analytics | 3 of 17

Managing foreign exchange (FX) impacts to a corporation’s financial statements can be a challenge, especially as the organization continues to grow and new treasury processes and regulations are introduced. Corporates look to mitigate this currency risk by leveraging technology, but most need more than what is available in a treasury management system (TMS) to fully manage FX exposure.

1 11 Currency Surprises in 13 Quarters, FiREapps.

2 Global Treasury Benchmarking Survey 2016, Reval.

OF TREASURY PROFESSIONALS USE TMS AS THEIR PRIMARY TECHNOLOGY 2

44%

With 11 currency crises in the last 13 quarters alone that resulted in extreme volatility – including the 10 percent plunge of the Brazilian real in Q2 2017 – it is apparent that FX can negatively impact companies at any time if exposures are not properly managed.1

TMS are used by 44 percent of global treasury professionals as their primary technology to gain visibility into cash and risk on an enterprise level.2 However, their capabilities in the foreign exchange risk management space are limited. As such, treasury teams are looking to supplement their FX risk management program to curtail

negative currency impacts affecting their company’s bottom line. This breeds the perfect opportunity to implement a currency analytics solution to help reduce EPS at risk and increase EBITDA predictability.

... [TMS] CAPABILITIES“

”

in the

FX RISK MANAGEMENT SPACEARE LIMITED.


https://www.fireapps.com/currency-crisis-infographic/

https://www.reval.com/resources/global-treasury-benchmarking-survey-2016/

FiREapps | Currency Analytics | 4 of 17

BY LEVERAGING CURRENCY ANALYTICS WITH ITS TMS, ORGANIZATIONS GAIN:

“ACT” DATA

ANALYTICS& REPORTING

BETTER DECISIONS

This white paper explores how the extended FX risk capabilities of a currency analytics solution benefit a company’s program and complement areas where most TMS lack FX risk functionality.

Currency analytics solutions, in addition to a TMS, provide visibility into the underlying drivers of currency risk, confidence in exposure data and comprehensive reports to determine the best way to manage and reduce currency risk. Ultimately, a currency analytics/TMS-run FX risk management program provides treasury teams with the ability to analyze working capital, optimize FX positions and pass through the treasury workflow from initiation and execution to

settlement – something that isn’t possible without the implementation of a currency analytics solution and a TMS. If you are a treasury professional concerned about the effectiveness of your FX risk management processes, this white paper offers a detailed look at how currency analytics enhance FX risk management through the ancillary functionality it provides to a TMS.

Access to accurate, complete

and timely data to establish

confidence in results.

Enhanced FX exposure analytics

and reporting to determine

the most cost-effective way to

manage risk and to benchmark

the success of their program.

The capacity to make risk

mitigating decisions with

recommended hedge

and exposure elimination

opportunities.

Copyright © 2018 Rim Tec Inc. All rights reserved.



FX RISK TECHNOLOGICAL ADVANCEMENTS: A BETTER TO WAY MANAGE CURRENCYTreasury Management Systems (TMS) provide an array of functionalities.

SOME TMS OFFERINGS INCLUDE: 3

DebtManagement

In-House Banking

Cash Management& Forecasting

Bank Account Management

HedgeAccounting

RiskManagement

CommodityManagement

InvestmentManagement

These functionalities, although invaluable, leave treasury looking for ways to supplement their needs in regard to pre-trade, FX risk management offerings. Currency analytics provide access to accurate, complete and timely data to facilitate more precise and efficient risk mitigation decisions. Additionally, enhanced exposure analytics and in-depth reporting give clear insight into currency risk and best practices.

The insight and confidence that come with the implementation of a supplemental technology solution can greatly enhance FX risk management processes through both internal exposure reduction and more efficient external hedging. This makes a currency analytics solution, a niche area in the FinTech industry, the complementary technology needed to round out a TMS-anchored program.

3 2016 TMS | TRMS Analyst Report, Strategic Treasurer.

�

�



https://strategictreasurer.com/analyst-reports/2016-tms-analyst-report/


QUESTIONS TO ASSESS IF YOU NEED CURRENCY ANALYTICS IN ADDITION TO YOUR TMS

Support summary level transaction currency balance collection and consolidation to a single view?

Generate exposure calculation and analysis by currency pair at a company, entity, account group, account level and/or any customized reporting dimensions?

Facilitate currency and rate impact analysis, Value at Risk (VaR), and balance and exposure trend reporting?

Initiate exposure aggregation, consolidation and netting at a currency pair level?

Eliminate exposures organically to reduce currency risk across the entire organization?

Enable an end-to-end workflow with transaction currency data collection, review and approval with full audit and compliance trail?

Does your TMS...

1

3

5

2

4

6



To effectively manage FX risk, it is important to first understand the data needed to do so. Data must be representative of the entire corporate enterprise, properly reflect accounting transactions and remeasurement activities, and available in a timely manner.

The current FX risk offerings of a TMS are limited, as most TMS don’t focus on the data quality of transaction currency details for identifying balance sheet exposure or the pre-trade cash flow forecast collection and aggregation process.

The data fed into a TMS is integral in determining the effectiveness and success of an FX risk management program. Most TMS passively capture uploaded exposure data, using it to carry out hedge accounting processes without analyzing or reporting on the actual integrity of the data. In this instance, most treasury teams are beholden to the accounting team to provide exposure estimates after the books are closed. If the data collected is not accurate, complete and timely (ACT), the designation, measurement and presentation of the exposures and


THE IMPORTANCE OF THE UNDERLYING EXPOSURE CURRENCY DATA

resulting derivatives from the TMS may be incorrect as well. As such, most treasury teams are managing only a fraction of their risk with data that may be weeks old and often incomplete, leaving them susceptible to material impacts.

Currency analytics solutions are specifically designed to focus on transaction currency balances and exist to limit the impact of FX to financial statements. Through direct interaction with ERPs, source systems and local resources, currency analytics solutions facilitate complete extraction of account balance data. Additionally, they provide data quality and remeasurement analysis, comprehensive FX reporting and recommend actions to reduce exposure and risk based on cleansed data in the system.

The value of a TMS is irrefutable and with the growing volatility in the currency market, as is the need for a currency analytics solution to enable efficient decision-making processes and establish confidence in the results of an FX risk management program.

An effective & successfulFX RISK MANAGEMENT PROGRAMTMS

“ACT”DATA



The aggregation of on-demand transaction currency balance data from ERPs, spreadsheets and additional source systems consolidated into a single view is the best way to have clear insight into the underlying drivers of balance sheet exposure data. FiREapps for Balance Sheet offers SAP and Oracle certified toolkits, queries for JD Edwards and PeopleSoft, and numerous data specifications for creating reports from other source systems to facilitate automated data extraction.

These direct interactions provide detailed transaction currency balance information including entity, account and transaction currency detail. Designed to ensure the FX risk management program is aligned

LEVERAGING A CURRENCY ANALYTICS SOLUTION FOR THE BALANCE SHEET


with accounting activities, currency analytics solutions ensure any new entities and accounts added into the system automatically flow through into the data extract. On-demand access to the drivers and data associated with the company’s FX risk create a direct channel for treasury to better manage FX risk.

Currency analytics solutions provide timely transaction currency balance details for user-defined frequencies (daily, weekly, monthly, quarterly). The data can be configured to reflect the custom corporate reporting structure for entity groups, geography, profit centers, product lines, etc. After aggregation, the balances can then be netted into a single consolidated view by currency pair.

for Balance Sheet offers:

Other Source Systems

CERTIFIED TOOLKITS FOR: QUERIES FOR: DATA SPECS FOR:

SAP® Certi�edPowered by SAP NetWeaver®



Having timely and complete data is only useful if the data collected is accurate. If an organization lacks comprehensive data, the TMS does as well – thus, the results of the program suffer. Currency analytics solutions provide tools for treasury to assess opportunities and recommend actions for remediation if the balance sheet accounts and transaction currency balances do not accurately reflect corporate exposure.

Understanding the accounts that are flagged for systematic remeasurement and those modified with manual adjustments at month-end is a critical element of defining balance sheet exposure. Similarly, visibility into transaction currency details for posting and clearing processes in monetary accounts and side-by-side comparisons of intercompany transactions give treasury insight into


operational activities that impact exposure, and thus the confidence to build a successful program to manage FX exposure accurately.

By identifying clean balances and flagging questionable and inaccurate ones, currency analytics tools empower treasury with detailed, actionable information. Whether the team proceeds with hedging or initiates a discussion with accounting regarding the impact their activities have on corporate exposure, treasury knows they are acting with full knowledge and understanding of the true risk.

This level of visibility provides greater data confidence, giving treasury the information they need to report FX gains/losses to investors and make hedging decisions reflective of the actual exposure.

ExposureCapture

ExposureManagement

FiREapps

TradeExecution

Open Hedges

Internal / External Hedges

ExecutedTrades forSettlement

Confirmation forExecuted Hedges

Trade Management& Confirmation

ERP System

ERP System

ERP System

TMSTRADINGPLATFORMTrades for

Execution




“Currency analytics solutions are designed to provide insight into the currency impact of the corporate cash flow exposure forecasting process.”

LEVERAGING A CURRENCY ANALYTICS SOLUTION FOR CASH FLOW EXPOSURE FORECASTING

The focus of TMS for cash flow forecasting also varies from that of a currency analytics solution. Currency analytics solutions are designed to provide insight into the currency impact of the corporate cash flow exposure forecasting process. A critical part of providing this insight is ensuring the accuracy of the cash flow forecast. With FiREapps for Cash Flow, users log in, upload and verify their FX exposure forecasts at the transaction currency level. Relying on complete forecasts with transaction currency balance details from the field ensures the consolidated master forecast provides an accurate assessment of the organization’s cash flow exposure in a single view without the need for multiple rate conversions. Currency analytics platforms also include several tools and features to ensure the integrity of the forecast. Unlike spreadsheet based forecasting methods, treasury teams can prevent errors at the time of entry using granular cell-level variance metrics, instead of catching them after decisions have already been made on the incorrect data. Similarly, each forecast cycle begins with the creation of a baseline forecast generated using the most recent approved forecast. This

jumpstarts the cycle with a known, accurate forecast and allows for real-time feedback on the data quality.

These capabilities ensure the integrity and improve the accuracy and completeness of the forecast, providing confidence in the assessment up to the top level of the organization. This time-saving feedback is critical to driving process improvement and increasing collaboration and transparency between the field and central team. As a result, it provides the most efficient and accurate cash flow exposure forecasts available.




As part of a best-in-class FX risk management program, treasury teams rely on analytics to better understand and report the drivers of currency exposure and to identify risk mitigating opportunities. TMS offer robust analytics and reporting for all aspects of their product offerings, but currency analytics solutions offer an additional level of detail with in-depth exposure and FX risk management reporting.

Currency analytics solutions analyze how FX impacts financial results to define exposure and identify opportunities to reduce risk. They provide exposure analyses by currency pair with exposure netting at a company, entity, account group and account level, and drill-down capabilities to view underlying data from any level in real time.

Enhanced by the ability to bring in and view multiple sets of data at a time, currency analytics solutions give clarity into what

happened from a currency perspective from one period to the next, allowing treasury to understand business trends and changes in the company as it evolves. Month-over-month comparisons support comprehensive FX gain/loss calculations to provide an estimation of what future results may be and to facilitate a comparison between the estimated and actual accounting results.

With this level of detail and technology-enabled analytics, treasury users can conduct in-depth scenario modeling with user-defined views and unlimited data inputs and rate sets. They can also create detailed transaction currency reports for user-defined periods with system calculated netting by company, entity and entity groups. These flexible configuration views enable comprehensive currency-based scenario testing, rate impact analysis and constant currency analysis to model for market events like Brexit.

ENHANCED FX EXPOSURE ANALYTICS & IN-DEPTH FX REPORTING

Cash Flow Reports

Category

1 Product

2 Products

2 Products

Top 4 Exposure Changes by CCY

| 11 of 17

ENTITY Category

Acme

East

Abc

2018K

435K

234K

Cash Flow Reports

Exposures by CCY

ENTITY Category Category Category

Acme

East

Abc

2018K

435K

234K

1 Product

2 Products

2 Products

3458.08

3456.09

2806.09

Category

3458.08

3456.09

2806.09

Inflow & Outflow

Cash Flow Reports

Exposures by CCY

ENTITY Category Category Category

Acme

East

Abc

2018K

435K

234K

1 Product

2 Products

2 Products

3458.08

3456.09

2806.09

Category

3458.08

3456.09

2806.09

Exposures by Entity




COMPREHENSIVE FX MANAGEMENT WITH A CURRENCY ANALYTICS SOLUTION Aggregation of accurate, complete and timely data, enhanced analytics and in-depth reports provide treasury with an understanding of their exposures. But once they have that information, what should they do with it and how can a currency analytics solution help?

Acting on the information supplied from a currency analytics solution and a TMS involves decision making to determine how a corporation can mitigate their risk with the newfound insight they have into their data. This can include deciding whether to hedge, taking internal actions to reduce risk or changing business practices to limit exposure causing activities.

By taking a holistic approach to managing exposure, most organizations also drive internal process improvements.

INTERNAL ELIMINATION OF FX EXPOSURES

Unlike a TMS, currency analytics solutions provide visibility into how FX impacts a corporation and suggest how to mitigate currency exposures beyond placing hedges. This allows treasury to manage some of their exposures without the cost of hedging.

For example, treasury can use scenario modeling capabilities to do “what if” analyses to determine if changing the functional

currency of an entity could reduce exposure organically. They can also analyze where to open a new shared service center to offset currency risk by adding expenses to a country where there are already revenues. In addition, treasury users can advise on the currency their procurement contracts should be in to reduce exposures.

Other opportunities for exposure reduction include cash conversions and intercompany transfers. This differs from the recommendations done by a TMS, as currency analytics solutions look to determine which decisions decrease exposure.

These actions can be done before any hedges are placed - permitting treasury to cut costs by potentially trading smaller amounts. Currency analytics solutions can accommodate a variety of workflows, from a simple process where treasury analyzes and monitors exposures to reduce them organically without entering hedges, to very complex workflows for corporates that want to centrally manage their exposure net by a common reporting currency, but want to manage their mark to market at an entity level.



FROM A RISK PERSPECTIVE

The complete and accurate data formed during the aggregation and analysis process is necessary for proper decision making. Having clearer insight into exposures enables treasury to look at their risk and determine the best way to manage it without their costs exceeding the value of the exposure itself. FiREapps Cost and Risk Efficiency (CoRE™) Analysis enables treasury teams to be confident in their hedging decisions, improve cost analysis and reduce risk.

CoRE focuses on the greatest sources of foreign currency risk – targeting currencies


by exposure and volatility to assess their potential economic impact. By quantifying total exposure based on Value at Risk (VaR) calculation, treasury can highlight the maximum risk and cost reduction opportunities available based on existing exposure and currency portfolio. This lets treasury prioritize the currencies that can be hedged and establish best practices and benchmarks for currency market transactions.

CoRETM ANALYSIS

$300K

INTEREST INCOME

VALU

E AT

RIS

K (V

aR)

(INTEREST EXPENSE)

$150K $0K ($150K) ($300K) ($450K)

��

$ 15 M

$ 12 M

$ 9M

$ 6M

$ 3M

$ 0

CURRENT RISK MITIGATIONTOTAL VALUE AT RISK FiREapps CoRE CURVE




THE WORKFLOWOnce the data is aggregated from the ERP and the exposure data is formulated, treasury can use the currency analytics solution or TMS to form the hedge and trade decisions. If the currency analytics solution does the decisioning, the application can simplify the hedging process by applying preset parameters to hedge recommendations with review and approvals before secure exposure or trade files are automatically sent. This straight-through process from ERP to FiREapps to a TMS and/or trading platform automates and smooths the FX risk management process, ensuring exposures are being managed swiftly using up-to-

The CoRE pinpoints how corporations can reduce the most amount of risk at the lowest cost through:

Improving corporate communication and reporting

Differentiation between the cost and benefit of hedging using interest rate differentials

Providing an intuitive overview of potential risk reduction opportunities while operating in accordance with a company’s risk tolerance

Identifying and quantifying total currency risk portfolio, including visibility into contributing accounts and currency pairs1

3

2

4

date data. From there, TMS can carry out the important hedge accounting processes needed to foster the reporting and compliance required by accounting rules.

MORE THAN 70 PERCENT OF FiREapps CLIENTS ALSO

HAVE A TMS

70%




In a recent benchmarking report, foreign exchange volatility was listed as the top strategic challenge for treasury organizations.4

Aside from reducing overall FX risk and further empowering a TMS, the implementation of a SaaS-based currency analytics solution is fast – measured in weeks, instead of months. The lower cost of implementation and speed

at which the solution is up and running boasts quick wins for better program results with limited effort. Additionally, a currency analytics solution provides quantifiable results and explainable return on investment (ROI) needed to justify the overall budget of a currency analytics/TMS-based FX risk management program.

CONCLUSION

4 2017 Global Corporate Treasury Survey, Deloitte.

FX VOLITILITY

VISIBILITY INTO GLOBAL OPERATIONS,

CASH AND FINANCIAL RISK

EXPOSURES

CASH REPATRIATION

LIQUIDITY ENTERING/MANAGING

WITHIN RESTRICTED

MARKETS

52%43%

40% 39% 31%

TOP STRATEGIC CHALLENGES FOR TREASURY ORGANIZATIONS4



https://www2.deloitte.com/us/en/pages/risk/articles/global-corporate-treasury-survey-2017.html


No matter how a corporation chooses to manage FX, leveraging FiREapps as your currency analytics solution with a TMS can help reduce risk and costs of an FX management program through the following:

DATA Data harvesting, aggregation and cleansing empowers corporations to measure the improvements in their currency intelligence and facilitate more accurate decision making.

INSIGHT

Insight into currency risk provides access and visibility into accounting and transaction currency data that can be used to eliminate exposure organically and drive a more effective hedging program.

AUTOMATION Automation from end-to-end, including

direct ERP data collection and aggregation, forecast consolidation and exposure and risk analysis generation, as well as STP to trading platforms and TMS, streamlines risk mitigation processes.

AGILITY Agile capabilities of a currency analytics

solution allow corporations to react to changing customer and market needs, reporting requirements and shifting rules and regulations.

Insight

Data

Agility

Automation

�

�

�

� CONFIDENCE

FiREapps, a leading SaaS-based currency analytics company with solutions for balance sheet, cash flow and income statement, works as a complementary technology to a TMS to help identify what can be done to reduce the impact currency has to financial statements and empowers treasury to have confidence in their data, processes, reporting and results.



Copyright © 2018 Rim Tec Inc. All rights reserved. 020218 FiREapps | Currency Analytics | 17 of 17

FiREapps is the leading provider of corporate currency analytics and FX exposure management

technologies. Established in 2005, FiREapps developed the first solution to automate foreign

exchange exposure management for multinational companies. Through a combination of

software solutions and expert analysis, FiREapps helps companies ensure they’re accurately

measuring and managing their FX exposures. Numerous Fortune 500 companies rely on

FiREapps technology to help them reduce FX risk and increase efficiency every day.

FiREapps is headquartered in Scottsdale, Arizona, with offices in Portland, London and Frankfurt.


https://www.fireapps.com/request-demo/

https://www.fireapps.com/tms/

Documents

CURRENCY ANALYTICS - FiREapps...2002/02/18 · local resources, currency analytics solutions facilitate complete extraction of account balance data. Additionally, they provide data