The Treasurers Guide to Currency Management

This article is written by Kantox

In our most recent episode of CurrencyCast, titled “The Treasurers Guide to Currency Management,” the hosts of the Corporate Treasury 101 podcast, Guillaume Jouvencel and Hussam Ali, interviewed Agustin Mackinlay, our host, to dive deep into the world of currency management and the crucial role it plays in corporate treasury.

Currency management goes beyond currency risk management and encompasses pricing with exchange rates, risk management, and the execution of foreign currency payments. In this blog post, we explore the highlights of this episode and provide a glimpse into the fascinating world of currency management.

Understanding Currency Management

Guillaume and Hussam started the conversation with a very important concept, which is currency management. What is the main difference between currency risk management? This is the very core of our solutions, and we wanted to share how currency management is approached at Kantox. It is a powerful tool for treasurers and CFOs to add more value to the firm.

Currency management vs currency risk management

Currency management is often mistaken for currency risk management. While the latter focuses on mitigating the risks associated with exchange rate fluctuations, currency management encompasses the entire workflow of dealing with foreign currencies.

This workflow starts with pricing in another currency, managing the risks involved, and concluding with executing foreign currency payments and collections. On the other hand, the process of risk management is usually understood as executing hedges.

At Kantox, we understand currency management from a broader perspective, and we believe that it is possible to manage the underlying risk in currencies without executing hedges. It is an opportunity for treasures to act more as strategic players within the company and enable the firm to take advantage of those currencies to enhance the firm’s competitive position and secure the budgeted profit margins. 

The Need for Currency Management

Then the discussion went on about where the need for currency management originated.

In today’s globalised world, thousands of companies are exposed to currencies in their daily operations. This exposure can be commercial or financial in nature. Commercial exposure occurs when companies buy or sell goods or services in foreign currencies, while financial exposure arises from activities like making loans in foreign currencies.

Currency management becomes essential for companies to price products, manage currency risks, and handle payments and collections effectively.

Instruments Used in Currency Management

In the episode, some of the main instruments used in currency management were also presented to give an overview of what treasurers and finance professionals would be working with. These instruments are:

  1. Spot Contracts: Spot contracts involve immediate payment and delivery of currencies, typically within two working days. They enable companies to exchange one currency for another at the current market rate.
  2. Forward Contracts: Forward contracts allow companies to buy or sell currencies at a specified future date and exchange rate. These contracts are particularly useful for managing currency risks associated with anticipated transactions.
  3. Swaps: Currency swaps involve the simultaneous buying and selling of one currency against another, but with different value dates. They provide flexibility in managing currency exposures that do not align perfectly with settlement dates.
  4. Options: Options give companies the right, but not the obligation, to buy or sell currencies at a specified rate until a certain expiration date. They offer flexibility, but the premiums for options can be complex to calculate.

Some others were also mentioned, such as future contracts.

Different Industries, Different Needs

Later on, Agustin highlighted another consideration when it comes to currency management. It is also important to understand how currency management impacts companies differently depending on the industry. Some of them have unique requirements when it comes to pricing characteristics.

For example, the travel industry, with its dynamic pricing and constantly changing exchange rates, requires automated solutions to manage currency exposures effectively. On the other hand, industries that maintain stable prices for longer periods may adopt different strategies.

Main Actors of Currency Management

And who are the main actors involved in currency management? Corporates are the primary users of currency management solutions as they face currency fluctuations in their transactions. FX dealers act as intermediaries between corporations and banks, facilitating foreign exchange transactions. Financial institutions play a crucial role in FX markets, mediating between buyers and sellers and handling a significant portion of the daily transaction volume.

Technicalities of Currency Management & Automation

The pre-trade and trade phases of the FX workflow

To help finance professionals understand the whole currency management process, Agustin gave a short summary of the three phases of the workflow: pre-trade, trade, and post-trade.

He put the emphasis on how complicated the process of exposure gathering is in the pre-trade phase. Gathering exposure refers to collecting and capturing data related to currency risks. This step is crucial in identifying and quantifying currency exposures to implement effective hedging strategies.

That exposure needs to be captured in its entirety and in a timely manner in order to hedge it. This point is rarely discussed in financial textbooks. Yet, in real life, it is easier said than done. The relevant information can come from different company systems. Subsidiaries may not be quick to submit it. Yet it is a critically important process in currency management.

Then, discussing the trade phrase, he touched on the next step, which is exposure processing. Once exposure data is collected, it needs to be processed according to predefined rules. This includes aggregating individual exposures into positions and determining the appropriate hedging program to manage the risks effectively.

The entire currency workflow, consisting of the pre-trade, trade, and post-trade phases, can be automated. We call this ‘end-to-end’ automation. We recently discussed in our podcast the concept of ‘discrete’ vs. ‘end-to-end’ automation. While the former relates to a particular problem, the latter refers to an entire process.

How can this process be automated?

The currency management workflow is a multifaceted process that can be automated. In the episode, the concepts of ‘discrete’ vs. ‘end-to-end’ automation were discussed to explain why we’re big fans of ‘end-to-end’ automation at Kantox. 

While the former relates to a particular problem, the latter refers to an entire process. With this example, it became clear what the advantages of choosing to automate the whole FX workflow were. If a treasurer manages to save a few dollars, euros, or pounds on trading costs because the trade phase was automated, that’s fine. Except that, if there is no proper integration with the pre-trade phase, that can be a pretty serious problem.

As for the specific technology that helps to automate currency management, by far the most important connectivity comes from Application Programming Interfaces (APIs). An API is a software-to-software interface that allows two or more computers to communicate with each other.

And this connectivity can be leveraged across the whole workflow—in pricing, in hedging, and in reporting. This way, Treasurers and CFOs don’t have to spend excess time conducting manual tasks. Finally, the use of APIs also helps companies reduce spreadsheet risk, i.e., the risk of manual data input errors, copy-and-paste errors, and formula and formatting errors.


Leave a Reply