avantgard

Foreign Exchange
Exposure Management:
A benchmark survey of foreign
currency exposure and risk practices,
challenges, and results

Table of contents

1 Introduction

Key Findings

2 Study Landscape
2 FX Gain/Loss Results and Indicators
3 FX Exposure Management Practices

How Often Do You Monitor Exposures?

Do You Have a Formal FX Policy?

Hedging

Trade Methods

4 Key Challenges to Managing FX Risk

Foreign Currency Data Issues and Process Transparency

Achieving Timely and Complete FX Data

5 Conclusion

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Introduction
In todays volatile global economy, amidst swift and sudden shifts in currency trends, corporations
worldwide increasingly regard foreign exchange (FX) exposure management as a critical component of
their overall strategy to cut costs, manage risk and maximize corporate value. One of the fundamental
challenges companies face as they seek to optimize their FX exposure management results is a lack of
standard processes, uniform policies or other benchmarks to define a successful program.
In response, the following global study was conducted to benchmark foreign exchange exposure
management practices and FX risk management results. The study is based on responses from 275
participants across 16 primary industries, and more than 17 regional classifications; grouped as 66%
Americas, 24% Europe/Middle East/Africa and 10% Asia Pacific.
The purpose of this study is to allow organizations to benchmark themselves against their peer groups
and explore how these organizations are managing FX risk today, evaluating methodology around
frequency, source of data, and types of calculations utilized. As such, the data is often segmented
looking at organizations by revenue size and by business scope such as number of currencies.
The majority of survey questions focused on FX impacts to the balance sheet; future studies will focus
on revenue and expense impacts.
Key Findings
The study reveals that material FX gains/losses over the last 12 months were the rule, rather than
the exception, where material impacts were defined as +/- 5% of net income. Across a broad range
of industries, revenue categories, and regions, FX gains or losses had a material impact in 59% of
the organizations responding to the study. This contrasts with results of a similar study conducted
in 2008, where just 40% of companies reported a material FX gain/loss (a 45% increase). A majority
of respondents (45%) monitored FX exposures only on a monthly basis, with 31% conducting more
frequent exposure monitoring. With a majority of respondents citing challenges with data integrity and
exposure calculation, this suggests that, lacking transparency to account-level details, frequency cannot
overcome more fundamental issues.
The key challenge identified by executives and FX practitioners as part of this survey highlight one
of the principle causes of unanticipated FX results: a fundamental lack of confidence in the integrity
of FX data and the timeliness and validity of resulting FX exposure calculations. The top three FX
management challenges, as ranked by survey respondents (on a scale of 1-6, with 1 being most
challenging), related to the difficulty in quantifying exposure at 2.58, confidence in data was rated 2.93
and timely access to data received a 3.03.
The study heightens awareness around the limitations that unreliable data and inefficient exposure
management processes can place upon even the most sophisticated organizations. Regardless of policy,
frequency of analysis, company size, industry or geographic distribution of business, the top issues are
centered around the inability to get to accurate data for the analysis.

Foreign Exchange Exposure Management

Study Landscape
A global study focused on FX management was conducted during the first quarter of 2010. The study reviewed
practices of 275 finance executives and practitioners across a diverse set of industries. A majority of responses
were derived from the industrial manufacturing sector (22%), with more than 16 sectors represented in total.
The companies surveyed ranged from smaller corporations (under $500M USD in revenue) to those
generating more than $10B in annual revenue, with the majority falling between $1B and $3B. As the
survey results demonstrate, no strong correlation was witnessed between the size of an organization
and its FX practices or results.

FX Gain/Loss Results and Indicators

In an environment where long-term global currency volatility is on the rise, one key metric for companies
managing their foreign exchange exposure is whether or not they experienced a material FX gain/loss.
A majority of survey respondents (59%) reported that they had
experienced a material FX loss or gain in the past 12 months. This
contrasts with results of a similar study conducted in 2008, where just
40% of companies reported a material FX gain/loss (a 45% increase).
With many variables influencing the inability of companies to manage
FX results according to expectations, neither the annual revenue
(domestic and international), nor the percent of business conducted
internationally was a clear indicator of how
the company would perform with respect
to FX management. For companies wishing
to benchmark their own potential FX risks,
these results suggest that regardless of
company size or international revenues,
there remains a high degree of susceptibility
to a material FX impact. Taking into account
additional FX impacts to corporations that
were economically significant but technically
immaterial (i.e. +/- 4.9% or less of net
income), foreign currency volatility clearly
presented a substantial economic risk over
the last 12 months.

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Looking at FX gain/loss results by the percent of international

revenues produced similar mixed results. A slim majority of
companies at both extremes (those with less than 10% of revenues
coming from international business and those with international
revenues greater than 90%) avoided material FX gains/losses.
The majority of companies in the middle (11-89% international
revenues), however, reported material FX gain/loss results over the
last 12 months. Discounting the outliers at either extreme, 64% of
companies with international revenues between 11-89% of total
revenue experienced material FX gains/losses.
After evaluating business profile criteria such as industry,
company size, or percent of business conducted
internationally, the study then took a look at the
underlying methodologies being used to evaluate FX risk.
While profile criteria did not uncover any correlations to
material impact, there were some linkages uncovered
when evaluating methodology. These are discussed in the
next section.

FX Exposure Management Practices

With a lack of established standards and best practices, companies have employed a wide variety of
approaches to calculating and monitoring FX exposures mitigating of FX risk. The following section
highlights the various policies and methods that companies rely on today. The survey results demonstrated
no strong correlation between specific practices and FX gain/loss results, suggesting that the underlying
challenges of achieving accurate and timely FX data is fundamental to successful FX risk management.
How Often Do You Monitor Exposures?
A majority of respondents (45%) monitored FX exposures
only on a monthly basis, with 31% conducting more frequent
exposure monitoring. With a majority of respondents citing
challenges with data integrity and exposure calculation, this
suggests that, lacking transparency to account-level details,
frequency cannot overcome more fundamental issues.
Do You Have a Formal FX Policy?
65% of the respondents report having a formal FX Policy. What
is perhaps notable is that there is not a significant difference
between the policy categories when it comes to whether or not
a company is more susceptible to a material loss or gain. In fact,
those companies with no policy at all registered just slightly higher
than those companies with a formal or informal policy.
Hedging
Of the respondents, 71% state that they hedge 80% or less of their
exposure, while 34% report that they hedge less than half. Suboptimized hedging can often be a sign of a lack of confidence in
FX exposure calculation. Companies occasionally make a conscious
decision to under-hedge; essentially hedge their hedges to
prevent over-hedging an exposure whose magnitude they have
over-estimated. Of course, de facto under-hedging often occurs
because the company has under-estimated its exposure.

Foreign Exchange Exposure Management

The majority of respondents choose to hedge based on a specified unit amount of their entire exposure,
versus using a specified percentage of the total exposure, or a specified number of currencies reflecting
the Top X exposures. Anecdotal evidence (based on experience not formally captured by this survey),
suggests that companies may be able to increase their hedge efficiency by expanding the currencies
they monitor, while taking into account the volatility of each currency (in addition to the magnitude of
the exposure), as they make hedging decisions.
Trade Methods
A majority (53%) of respondents use a Trading Desk vs. a Portal (just 20%) to execute trades, reflecting
the automated nature of the foreign exchange exposure management process as a whole.

Key Challenges to Managing FX Risk

As the study findings illustrate, a majority of companies across a broad range of industries, total
revenues and international revenues experienced material FX gain/loss results over the last 12 months.
With no clear trend emerging in terms of the business profile of these companies as they relate to FX
results, the top FX management challenges cited by survey respondents spoke to the heart of the issue.
As the results below illustrate, the top three FX management challenges, as ranked by survey
respondents (on a scale of 1-6, with 1 being most challenging), related to the challenges of access to
data and confidence in data, followed by timely access to data. Respondents identified Difficult to
Quantify Exposure as their top concern, followed by low confidence in FX exposure calculations, and
timely access to data as their number three concern. All three concerns are interrelated and point to
an overwhelming challenge around gaining access to accurate data in a timely fashion. Without this,
companies lack the ability to make risk mitigation decisions with confidence.
While the related issue of process automation to speed data aggregation and exposure calculation
rank next-highest in priority, less-related issues like lack of knowledge and lack of management
priority ranked significantly lower.
Foreign Currency Data Issues
and Process Transparency
Challenges related to confidence in data and
difficulty in quantifying exposures expressed in
this survey have their roots in accounting errors,
break-downs in accounting controls, system
configuration issues and process deficiencies to
which Treasury has limited visibility.

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Lacking this visibility, data integrity issues are extremely difficult to detect until a major problem has surfaced.
Frequently, off-setting data errors and omissions can falsely mask the true magnitude of a companys
exposure in ways that make it difficult to get to the source of an error. This accounting volatility can evolve
into a pervasive, self-reinforcing problem that grows increasingly complex and intractable over time.
The biggest accounting and organizational issue impacting accurate FX exposure calculation is manual
accounting processes. The improper recording and relief of a transaction, and improper, unilateral recording
of intercompany transactions are two prevalent sources of error that can seriously distort a companys foreign
exchange exposure. As a result, the exposure is not visible and cannot be managed by Treasury. The foreign
currency gain/loss associated with this transaction exposure is not realized incrementally in conjunction with
the process of account revaluation. Rather, it is realized all at once, when the transaction is cleared or settled.
FX-related system configuration, administration and maintenance issues in most major ERP systems result
in inconsistent revaluation of accounts across the enterprise. Examples of accounts that should be revalued
but are not, and accounts that are being revalued, but shouldnt be, are widespread in companies relying
on todays most popular ERP systems. In most cases, companies are unaware of the problem.
Achieving Timely and Complete FX Data
As expressed in the survey, in a period of heightened FX volatility, the ability to achieve timely access to
complete and accurate FX data is critical to a companys ability to effectively monitor and manage FX risk.
Survey results further support the idea that timeliness alone is not enough. With no clear correlation
between the frequency of monitoring of FX exposure and/or automation of trade- or post-trade
processes, making decision faster based on suspect data only results in bad results delivered more quickly.

Conclusion
The real problem highlighted by these study results is that, essentially, treasurers and controllers alike
dont know what they dont know about their foreign currency exposure data. All too often, the first
symptom of a problem shows up as a material misstatement of FX gain/loss with serious consequences.
For Treasury to overcome the challenges identified in this survey and improve FX gain/loss results, they
must first achieve greater awareness of the problem. Automated foreign exchange exposure management
solutions available today can help treasurers achieve broader and deeper visibility to the foreign currency
exposure data they receive from accounting. As a result, treasurers are equipped to identify potential sources
of error or inconsistency, increasing their confidence in their FX management decisions and outcomes.
Transparency to account-level foreign currency exposure details for all currencies provides them with
the evidence and insight needed to root out fundamental problems and achieve a complete and
accurate FX exposure calculation. Automatic FX exposure calculations, presented in dashboard views
by currency, make it easier for treasurers to quickly identify the greatest sources of risk (or potential for
cost savings) to the organization.
The combination of transparency and operational efficiency gained by automating the gathering and validation
of data, along with the calculation of FX exposures, allows Treasury to focus their efforts on continuous
operational improvements, and to analysis and decision-making that results in more effective FX risk mitigation.
This study was conducted in cooperation with EcoSystem Community Member FiREapps, the leading
provider of corporate foreign exchange exposure management technologies. Established in 2005,
FiREapps developed the first solution to automate foreign exchange exposure management for
multinational companies, delivering unparalleled expertise and driving measurable results.

Foreign Exchange Exposure Management

About AvantGard
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