The NeuGroup would like to thank Reval for sponsoring the summer 2013 FX Managers’ Peer Group meeting last week, hosted by member UPS. Their anchor session mirrored a couple of member presentations on hedge reporting and metrics and dealt with risk analytics. The key theme was that not all exposures should be treated equally and in the same fashion, but rather as a portfolio of exposures. Diversification of risks and how they are correlated, or not, bring benefits such as allowing the hedger to prioritize exposures based on which hedges remove the most risk. This brought a new context to ongoing discussions on analyzing risk, reporting them accurately and optimizing hedge decisions rather than just hedging all exposures according to same formula.
Highlights of their remarks include:
- Risk is reduced when considered together as a portfolio because of natural offsets; some exposures are riskier than others and hedging them first has disproportional benefits.
- In contrast, “safe,” systematic layering of hedges across all exposures eliminates the opportunity for these portfolio benefits to occur.
- Metrics like Cash Flow at Risk (CFaR) can quantify these benefits. The concept of CFaR is, however, a complex one that requires educating senior management and external stakeholders to promote awareness and comfort with the portfolio approach. Members who employ similar approaches noted that they require ongoing internal commitment and education.
Thank you to all of the FXMPG members who participated in the discussions. Your shared insights and experiences continue to drive excellence in peer knowledge exchange.
The NeuGroup’s FX Managers’ Peer Groups (FXMPG and FXMPG2) bring together senior treasury professionals with responsibility for corporate foreign exchange management to share experiences and best practices with their peers. FXMPG1 and FXMPG2 are part of 15+ NeuGroups (www.neugroup.com) representing more than 300 members at 180+ companies.