Understanding Currency Exposure: 7 Essential Terms you should Know
This article is written by GPS Capital Markets Imagine you are part of the finance department of an artisan chocolate producer in the UK. Renowned for its premium products, and your small to medium-sized enterprise (SME). Then you decide to import macadamia nuts from Hawaii to bring an great flair to its product offering. The idea sounds intriguing. But as you delve into the specifics of doing business internationally, the challenges with foreign currency exposure come to play. When engaging in international trade, treasury departments play a critical role in safeguarding an organization from risk. So, where should you begin? A solid understanding of key terms related to currency exposure is an excellent starting point. This knowledge will guide you as you make informed decisions for your company. We have compiled a list of top fundamental currency exposure terms and their definitions. Defining Foreign Currency Exposure Exposure to foreign exchange risk involves the potential for financial loss due to frequent changes in foreign exchange rates. These fluctuations can negatively impact transactions made in a foreign currency rather than in the company’s domestic currency. The concern for a company is that fluctuations in foreign currency rates could influence its future cash flows. This is due to the unstable nature of foreign exchange rates. It’s not only companies that engage directly in transactions denominated in foreign currencies that are at risk of foreign exposure. Firms with indirect connections to foreign currencies also face this risk. Products imported from China can affect an Indian company competing with them. This is if the value of the Chinese yuan drops against the Indian rupee. This can grant importers a cost advantage over the Indian company. This shows how shifts in foreign currency values can impact companies. Even if they do not engage in direct foreign exchange dealings. Foreign Exchange (FX) Hedging Foreign exchange hedging is a strategy used by corporations to protect themselves from the risks. These risks are associated with fluctuations in exchange rates. By locking in exchange rates for future transactions through contracts like forwards, options, swaps, or futures, companies can ensure financial predictability. This can also reduce exposure to adverse currency movements. Let’s say our UK chocolate producer expects to pay his Hawaiian supplier $100,000 in 6 months, it can enter into a forward contract to buy $100,000 at a fixed rate today. If the US dollar (USD) strengthens against the euro (EUR) by the payment date, the company is shielded from the increased cost. Because it is already locked in a more favorable exchange rate. This practice is crucial for budgeting, forecasting, and protecting profit margins in international business operations. To learn more about hedging instruments, explore the article, “6 Benefits of Incorporating FX Hedging Solutions.” Derivatives The term derivative refers to financial instruments whose value is derived from an underlying asset, like stock, bond, or currency. In the currency market, these instruments allow corporate treasurers to hedge against foreign exchange risk. This will ensure that currency fluctuations do not adversely affect the company’s finances. Common types include forwards, options, futures, and swaps. Types of Derivatives Currency Forward Contracts A currency forward contract is a binding agreement between two parties to exchange a specific amount of one currency for another at a predetermined exchange rate on a specified future date. For example, the treasurer of a US company that expects to pay a European supplier €1 million in three months for goods imported from Europe, may choose to hedge against the risk of the euro appreciating against the dollar by using a forward contract to lock in today’s EUR/USD exchange rate for the transaction. By doing so, the company knows exactly how much it will pay in USD, regardless of future exchange rate fluctuations, aiding with its financial planning. Also Read Currency Swaps Imagine you are a Canadian company, needing Japanese yen (JPY) for an invoice due to a Japanese supplier in six months, but currently holding Canadian dollars (CAD). After locking into a forward contract, you determine that the supplier is going to be late delivering the product by 30 days. You can enter an FX swap by exchanging CAD based on the current spot rate and agree to extend the transaction by 30 days prior to the contract expiring. This swap allows you to hedge against the risk of JPY appreciating against the CAD over the next three months, while also giving you the flexibility to change the payment date, ensuring you know the exact cost of your future payment. Currency swaps involve two simultaneous transactions: exchanging a specified amount of one currency for another at a spot rate and reversing the exchange rate at a predetermined future date and rate. This tool helps in hedging against exposure to currency fluctuations and securing short-term funding in a different currency without impacting the balance sheet. Currency Options A currency option, also known as an FX option, is a financial instrument that gives the holder the right, but not the obligation to buy or sell money denominated in one currency into another currency at a pre-agreed exchange rate, or strike price, within a specified period. For instance, an Australian company that expects to pay $1 million in New Zealand dollars NZD in six months for goods from New Zealand, is concerned the Australian dollar (AUD) might weaken against the New Zealand dollar (NZD), increasing costs. The treasurer may buy an FX option to lock in a current exchange rate of 1.10 AUD/NZD for $500,000 NZD. If in six months, the AUD/NZD rate worsens to 1.20, the company can exercise the option, saving money by paying at the locked-in rate. If the AUD strengthens, say to 1.05, they can let the option expire, paying at the better market rate, with the option’s premium as the only cost for this price protection. Currency Futures Contracts FX futures contracts entail standardized agreements to buy or sell a currency at a predetermined price on a specified future date These contracts specify the currency amount, exchange rate, and settlement date. As all contract…
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Excel for the Modern Corporate Treasury
This article is written by Automation Boutique Excel has been a trusted tool for treasury and finance professionals for decades. Most of the treasurers we speak to today still indicate that Excel is a vital tool in their treasury operations. It is widely used for key processes, like cash flow forecasting, cash management, risk management and reporting. While Excel is familiar and extremely flexible, improvements to existing Excel-based processes are urgently needed to also make it a successful tool for the coming years. The good news is that Excel contains many hidden gems that allow you to develop models that are automated, robust, and easily auditable. The popular narrative has been to transition away from Excel in corporate treasury, mainly due to its potential for errors and the complexities of managing large files. At first glance, this is understandable, because most Excel-based processes have significant problems: But here’s the thing: a lot of treasurers (even those who are using a Treasury Management System (TMS)) still use Excel for important tasks. Why do they do this? First, a lot of treasurers have found out that there isn’t a single TMS that does everything they need. So, they still need Excel for some tasks. Second, some companies don’t have the budget or the need to buy a TMS. For them, Excel is the main tool they use for their treasury management. So, getting rid of Excel completely might not be the answer. Maybe there’s a better way to use Excel and still enjoy what it offers? How to Excel like a Pro Contrary to popular belief, we think Excel can remain a valuable tool for corporate treasury when used correctly. To maximize its potential, corporate treasurers should: 1. Use Automation Reduce manual tasks to make your work smoother and minimize errors. Options range from traditional methods like Visual Basic to newer tools like Power Query and Power Pivot. Optionally, RPA (Robotic Process Automation) can be added to automate the data refresh, data fetching, and action-taking based on the Excel outcome. 2. Ensure Traceability Knowing the journey your data has taken is crucial. Let’s break down why this matters: 3. Document the Excel-process It is important to document the purpose of the Excel file, the assumptions, how it was designed and how it should be used. Again, making use of Excel’s hidden tools can save a lot of effort for this often-neglected task. 4. Utilize Built-in Tools Over the years, Microsoft has improved Excel with powerful tools that can upgrade your existing Excel files: Power Query This tool lets you automatically gather and transform data from various sources, such as websites, databases, XML files, CSV files and other Excel sheets. You can perform actions like filtering and merging data with a few clicks. Importantly, Power Query remembers each step you take, which makes your process clear, robust, easy to replicate and to audit. Main advantages of Power Query include: Power Pivot This is another powerful tool within Excel that enhances your data analysis. Essentially, it allows you to manage and analyze large amounts of data, making your reports interactive and comprehensive. Main advantages of Power Pivot include: Looking Ahead with Excel Excel continues to be a key tool for corporate treasurers, but there’s a need to make it work better and more reliably. There are many features in Excel to help with this, but they are often hidden or forgotten. We at Automation Boutique can help you with reconstructing your Excel-based processes, making them automated, robust and easily auditable. Consider kicking things off with our “How to Excel” hands-on workshop. In this interactive and engaging session, we will work together to reconstruct your own Excel models, diving deep into Excel’s best practices and hidden gems. Don’t hesitate to contact us for further details. Happy Excel-ing! Also Read Join our Treasury Community Treasury Masterminds is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below to get more information. Notice: JavaScript is required for this content.
Implementing a Global Enterprise-scale Payment Hub: The Challenges and Business Impacts
This article is written by Nomentia With complex global operations, decentralized ways of working across treasury, finance, and accounting, a lack of process automation, and security concerns on the rise, you may be considering a payment hub for your enterprise. When juggling multiple priorities and all the operational tasks already stretching your organization, the implementation project may seem dreadful. It’s not a secret: Setting up a payment hub can be heavy-duty. Depending on the complexity of the case (number of entities enrolled, in which countries you roll it out, how many banks and bank accounts you have, whether you connect multiple ERPs, etc.), it may take anywhere from several days to several years. Nevertheless, if it’s done right, the payment hub can have significant business impacts—not just in improving ways of working but also in realizing cost savings. To explain how to set up a global payment hub on an enterprise scale, we will go through the main challenges, the project team and its setup, ways of working, lessons learned from our customers, and the benefits and business impact after the successful implementation. Before the start: the challenges you’ll face during a payment hub implementation All payment hub projects are different. While we have been working on small projects where we only connect one ERP and a few banks, and it only takes days to a few weeks, we have also been delivering large-scale projects for enterprises that could take even as long as one to two years of commitment. Whenever we undertake a massive project, both parties understand that it’s a long commitment and, therefore, a forward-looking project plan is essential. The challenges of implementing a payment hub are unique for each organization, but in our example, we will focus on the complex, enterprise-scale implementations where clients were dedicated to creating a payment factory within their organization. Keep reading even if you are implementing a less complicated solution, as the article gives some great insights for planning any payment hub implementation. 1. Global operations make the implementation complex Many Nomentia clients have undertaken massive payment hub projects with operations in over 100 countries. Even just operating in tens of countries has its challenges. If you must implement the payment solution in countries with strict legislation, like China or India, having a good implementation partner with experience is an advantage. Why do global operations make implementation complicated? One reason is integrating ERPs, financial systems, and banks. The other reason is more abstract: people generally don’t like change. It’s not unusual for local entities to have their own operational procedures; the process can also often be highly manual, if not entirely manual. In some cases, an integration between the internal system and the bank, like an ERP, may exist to execute payments automatically. Still, on a group level, you may have very little visibility on this. In addition to having localized operational procedures and local systems, each country and entity may have its own banking partner. Later on, we will discuss how working with many banks can complicate implementation. Moving away from the current ways of working comes as a big shock for many, even though you are trying to implement improvements that can benefit everyone. If you want to implement an immediately successful project, you must involve all necessary stakeholders in managing the change and getting the essential project-planning information. 2. Scattered system landscape Based on our first challenge, you may have already guessed the next one: A scattered system landscape can make the implementation project complex. If you have acquired new units from different regions, it’s possible that instead of running the business on one central ERP system, you have several ones used locally. Payment files may also be generated in other systems. If system consolidation is not currently possible, you should at least connect all source systems to the selected payment hub, allowing the payment files to be automatically forwarded to the correct bank. Having a scattered system landscape naturally poses a few challenges: 3. Preparing guidelines & change management: Communication is as important as the technical setup In an enterprise-scale project where tens of entities are involved, having good change management practices, ways of communication, and clear guidelines will set you up for success. Involve your teams The new payment hub will impact how hundreds of people work daily; at worst, moving from manual processes or local ways of working to a centralized, automated approach could be something people may even fear or be concerned about. Communicating how your operations will change positively when you introduce the new processes will help people perform their jobs well and make them feel involved in the project from day one. Your colleagues can also be great allies when you need to understand how to work with different banks globally. Choose the project team and include people with different backgrounds Choosing your team is the most essential part of the project! You don’t need a big team, but you should include people who understand your financial processes, how they work now, and how they should work when you automate them. Also, involve an excellent project manager to communicate with the payment hub provider, keep the project on track, and hold people accountable for the progress. Having one or two IT resources can also be helpful throughout the project. As you deal with integrations, although the payment hub vendor usually takes care of most of the integration work, your IT team members will still need to help the vendor, participate in the end-to-end testing process, handle master data management, and provide all the necessary technical details. Set up clear ways of working It’s also a good idea to clearly outline the ways of working for your project team. Identify the core team, the communication channels for sending each other instant messages and following the progress, your meeting cadence, and where you will share information with the larger group. 4. Connecting with the banks ‘Not all banks are the ‘same’—this is some of the best advice for when you start a payment hub project. Before you…
Frontiers of Banking: Navigating APIs & PSD2 Protocols
This article is written by Cobase In the modern corporate world, the efficiency of banking operations depends heavily on the communication protocols used to connect with financial institutions. In this extensive comparison, we delve into the nuances of various protocols like SWIFT FIN, SWIFT FileAct, Host-to-Host, EBICS (versions 2.4, 2.5, and 3.0), APIs, and PSD2, examining their strengths and weaknesses. In this blog post, we will focus on APIs & PSD2. APIs APIs, short for Application Programming Interface, play a vital role in today’s interconnected digital ecosystem. They enable different software systems to communicate with each other seamlessly and efficiently. Within the banking context, APIs provide a mechanism for banks to expose their services to corporations, facilitating direct integration with corporate systems. One of the main strengths of APIs lies in their ability to provide real-time or near-real-time access to banking services. Corporates can make API calls to check account balances, initiate payments, or fetch transaction history, receiving immediate responses. This allows corporations to have an accurate, up-to-the-minute view of their financial position and to execute transactions without delay. APIs also provide a high level of flexibility and customization. They can support a wide range of services and functionality, depending on the banks’ chosen level of exposure. Moreover, APIs can be designed to handle complex banking operations, like bulk payments or multi-step approval workflows, offering corporations the flexibility to tailor banking interactions to their specific needs. Another significant benefit of APIs is their potential for improving operational efficiency. By integrating directly with corporate systems, they can help automate banking processes, reducing manual intervention and associated errors. However, the use of APIs also brings certain challenges. A key concern is the technical complexity associated with their implementation. Each interface has its own specific requirements in terms of the request format, response handling, error handling, etc. Corporates need to ensure their systems are compatible with these requirements, which often demand significant IT effort and expertise. Security is another critical consideration. APIs essentially provide a gateway into the bank’s system, and improper implementation can lead to significant security vulnerabilities. Corporates need to ensure robust security measures, such as encryption, authentication, and access controls, are in place when using them. Moreover, the availability and functionality of APIs are entirely dependent on the bank. Not all banks may offer APIs, and even among those that do, the range of services exposed via APIs can vary widely. In conclusion, APIs offer a powerful and flexible mechanism for corporations to interact directly with their banks, providing real-time access to banking services and the potential for improved operational efficiency. However, corporations need to navigate the challenges of technical complexity, security, and variability in bank API offerings to harness the full potential of APIs for banking communication. Strengths: Weaknesses: PSD2 The Second Payment Services Directive (PSD2) is a transformative regulation implemented by the European Union to foster innovation and competition within the financial sector. PSD2 mandates that banks provide third-party providers (TPPs) with access to their customers’ accounts through APIs, provided the customer has given explicit consent. This is often referred to as ‘open banking’. This directive effectively shifts the control of financial data from banks to consumers, empowering them to use third-party services for managing their finances. For corporations, PSD2 presents an exciting opportunity to directly access banking services and improve financial operations. One of the main strengths of PSD2 is that it paves the way for real-time access to banking services. Corporates can utilize APIs to fetch account information, initiate payments, and access other banking services in real-time. This not only enhances visibility into their financial standing but also speeds up transactions and decision-making processes. Another significant advantage of PSD2 is its potential for innovation. By opening up banking data, PSD2 has spurred the development of new financial services and solutions. This can lead to more efficient banking processes, cost savings, and better financial management. PSD2 also lays down stringent security measures for financial transactions. It introduces strong customer authentication (SCA) requirements, which mandate two-factor authentication for most electronic payments, thereby reducing the risk of fraudulent transactions. Despite its potential benefits, there are also associated challenges. One of the major concerns is data privacy and security. While the regulation has strict guidelines for customer authentication and data protection, sharing financial data with third parties inevitably increases the risk of data breaches. Furthermore, the technical implementation of PSD2 APIs can be complex. Corporates need to ensure that their systems are compatible with the APIs of different banks, each of which might have unique requirements. Also, PSD2 is applicable only to banks operating within the European Economic Area (EEA). Corporates with banking relationships outside of the EEA might not be able to leverage the benefits of PSD2 with those banks. PSD2 is a ground-breaking regulation that has the potential to significantly improve the way corporates interact with their banks. The benefits of real-time access to banking services and the potential for innovative financial solutions must be weighed against the challenges of data security, technical complexity, and geographical limitations. Strengths: Weaknesses: Unique challenges While all these protocols offer diverse strengths, they also come with their unique challenges. Corporates must carefully assess their specific requirements, technical capabilities, security needs, and the geographical scope of their banking relationships before choosing the most suitable protocol. Consulting with financial and IT experts can help inform this crucial decision. Navigating the labyrinth of banking protocols can be daunting, but there’s a solution that simplifies it all – Cobase. With the ability to connect via all the protocols mentioned above, Cobase is a one-stop platform for corporates looking to streamline their banking communications. One of the key strengths of Cobase is its deep, in-house knowledge across all banking protocols. Whether it’s SWIFT FIN, FileAct, Host-to-Host, EBICS (2.4, 2.5, and 3.0), APIs, or PSD2, the technical experts at Cobase are well-versed in all. They take the burden off corporates to learn and implement these technical standards, allowing them to focus on their core business. What’s more,…
DOES YOUR TREASURY HAVE A DIGITAL MINDSET?
This article is written by Pecunia Treasury & Finance B.V. In an previous article I have talked about the IT changes that make life easier for a treasurer in the future (or now already). In this article I want to talk about the digital mindset of the person using the IT – the treasurer. Treasury is a numbers game. We treasurers use these numbers to optimize the cash or risk of the company. We make money with money. These numbers have to come from somewhere in the organization and it is usually never treasury itself. BIG data Big data is a hot topic in treasury but for treasury it was around longer. The treasurer needs to get their input information for all over the company. Cash inflow from sales, cash outflow from procurement and investment teams, HR etc. All this data needs to be gathered. The digital minded treasurer thinks about optimal ways of gathering this data: automatically. The treasurer starts its day with the actual cash balances and then looks forward. They basically need to predict the future. How great would it be if all this data would be available with the push on a button. An ideal world ? Maybe, but it is possible. Bank statements can be automated to be loaded collectively or in a Treasury Management System. The treasurer starts the day with up to date cash balances, and he has not started working yet as this was automated. He then updates the cash forecast. How? By pushing update in his cash forecasting system. Sounds too easy? True, it took weeks to find out where to find the needed input information and to automate getting this data grouped together and in a structured way. But a digital minded treasurer knows that the data is somewhere in the organisation; it only needs to found and linked to the treasurers information recourses so it is always available. The treasurer only has to check the validity and the quality of the data and see if it needs improvement. In this way the digital minded treasurer can automatically create a cash forecast and continually improve it. A cash forecast should be ready before the second morning coffee. In an ideal world it would be ready with a push on a button. Artificial intelligence makes it possible. The digital minded treasurer is steering it. Process improvements The digital treasurer looks at ways to improve its document flows and payments. Not only looking at costs but also looking at how many (manual) interventions are needed. FX deals can be setup to straight through processed (STP) while blockchain would make it possible to improve the speed of payments or document flows globally. Everything is connected, as payments go from a process to straight through and instant it has an immedicate effect on the cash availability and forecasting. While now the bank is the place to go for bank accounts and payments this might not be the case in 10 years. The digital treasury might be able to setup his own bank in the future. By using technology. The future The treasurer makes sure that he is on the steering wheel while technology makes it possible for him/her to check his surroundings so he does not crash. A bigger front window makes for a better view forward (forecasting), a higher max speed makes for quicker travel (updating changes in forecasting), adaptive cruise control saves effort on speeds control (automatic updating and AI, STP). The treasurer knows he needs to keep the engine running to keep moving. He also realizes that he does not need to be a mechanic to do this; however he needs to be able to tell the mechanics quickly why the car is not moving as the treasurer wants it to be so the mechanic can fix this. Or maybe the digital treasurer might change the car for a plane in the future, or even a rocket? It is clear that technology and treasury are interconnected. Already now and even more in the future. A treasurer therefore needs a digital mindset to survive and keep up with the information needs of his department and the company as a whole. And it’s not rocket science (yet). Also Read Join our Treasury Community Treasury Masterminds is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below to get more information.
How to Explain RPA To Your Granny
This article is written by: Automation Boutique Remember when children used to believe that there was a tiny man inside the radio speaking? Or when they checked the back of the TV looking for the show host? We are back to those days, and again, it is due to a new technology: Robotic Process Automation (RPA). Where is the robot in robotic process automation? The robot is not a physical one. There is no metallic little man walking around and clicking buttons inside the computer. The “robot” is just a set of instructions that the computer follows on its own, without the need for a human to do it. Your granny will surely remember when people used to grind corn into flour by using water mills propelled by a nearby river. That is automation. The movement of the mill (whose energy was supplied by the passing water current) could be called a robot. You see, the robot is not the mill itself, which would be equivalent to the computer (as the water current would be to electricity). The robot is the virtual (not physically existing) “executer” of the automated action, in this case, milling. We could imagine a little man pushing the mill incessantly. In the RPA world, we call this imaginary man a robot. What does this “automation” thing mean? Automation consists of mechanising actions so that they can be executed without the need for a human to be present or to spend time and effort on them. Put simply, automation is making someone or something else do it for you. Remember when previous generations built a scarecrow using straw and their granny’s hat to keep birds and wild boars away from plantations (as grandma can tell you, birds and wild boars love to destroy grain fields)? Imagine having to do that yourself: being out all night posing in the darkness to keep those naughty beasts away from your corn! That is not what the old generations did. Instead, they automated animal scaring. After understanding who the “robot” is and what automation means, we can move on to the only word left: process. What is this mysterious process that is being automated? In the case of a watermill, the process is grinding corn into flour. In the case of a scarecrow, the process is, you guessed it, standing in the field day and night while looking scary. In RPA, the process could be typing (writing on the computer, in case grandma is giving you a funny look) to send an email (a letter sent over the internet), or it could be going to a website (a website is like one of those internet places where your teenage grandson appears on pictures sticking his tongue out) and finding some information in it. All of this, or any other pre-defined, repetitive, and rule-based computer tasks, can be automated, just like previous generations automated grinding and scaring animals away. In automation, rules can be as complex as needed, but must leave no room for ambiguity. If ambiguity cannot be avoided, hyper-automation is required, which is, judging by Granny’s face (see picture above), best left for after naptime (and a whole other article). So here we have it. Robotic Process Automation: We use a robot (imaginary little man or, more seriously, a set of instructions given to a computer) to take a process (some work to do, usually divided into discrete steps) and automate it (do the work for us). Also Read Join our Treasury Community Treasury Masterminds is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below to get more information. Notice: JavaScript is required for this content.