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Lowering Hedging Costs with Better Analytics and Decision Support Tools

By Andy Gage
SVP, FX Risk Solutions and Advisory

Over the last several months we have been in discussions with a broad range of treasury teams exploring new ways to enhance their FX programs to contend with the combination of a strong dollar, increased FX market volatility and rising interest rates. Rising interest rates have a significant impact on FX hedging costs as the interest rate differentials impacting forward points have worked against them. In response to this dynamic, we have been helping companies examine where they can lower their hedging costs based on three different approaches.

Organic Exposure and Risk Reduction

The first opportunity we always explore with our customers is helping them use Kyriba’s FX Exposure Analytics to uncover opportunities to reduce exposure through internal actions they can take in concert with the accounting and finance teams such as converting unnecessary non-functional cash balances or settling intercompany balances in a timelier manner. These types of internal actions should always be a first step as they are the most cost-effective way to reduce exposure and the associated hedging costs.

Trade Netting Methodologies

The second area we have been examining with clients is the opportunity to net hedges across entities. For those companies that create hedges for specific legal entities, versus hedging at the “top of the house,” significant transaction cost savings can be realized. Through netting trades into single currency pair hedge, transaction costs can be reduced significantly and the hedge results can be automatically allocated back to each legal entity to satisfy reporting, tax or accounting requirements . There are a variety of techniques treasury teams can consider and with our tools, understand and estimate the cost savings benefits from netting trades.

Portfolio VaR Analytics and Decision Support

The third area we are having success with our clients is based on leveraging Kyriba FX’s Portfolio VaR Analytics and Decision Support tools. These solutions can help FX managers automatically calculate the amount of correlation benefit they have in their portfolio of currencies to see if there is an opportunity to reduce the hedging they need to do while still achieving the risk management mandate. The Kyriba Portfolio VaR solutions can also perform an optimization routine that helps FX managers find the most cost-effective way to balance the portfolio target achievement with the lowest cost of carry.

If you are like other clients we have been working with and have an interest in exploring ways to reduce hedging costs while still achieving your risk management objective, please reach out to my team at FX Advisory or visit our website and we can walk you through the art of what is possible.