Optimizing Hedging Programs: Assessing Risk and Achieving Compliance
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Optimizing Hedging Programs: Assessing Risk and Achieving Compliance

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Today's treasury teams have a multitude of complicated decisions when it comes to constructing and managing hedging programs for foreign exchange, interest rates, and commodities. Transparency is ...

Today's treasury teams have a multitude of complicated decisions when it comes to constructing and managing hedging programs for foreign exchange, interest rates, and commodities. Transparency is required at every turn. In this webinar, speakers discuss the requirements, assumptions, and regulatory influences that determine how corporate treasuries can optimize their hedging programs. Key topics include:

Assessing the risks: how to gain visibility into the various risk factors
Regulatory: interpreting the differences between FASB, IAS, and IFRS requirements
Visibility: what you need to know about your exposures to efficiently protect against financial risks
Technology: what options exist and how they really can help
Attendees of the full live online session have been approved for 1.2 CTP/CCM recertification credits by the Association of Financial Professionals.

Featured Speakers:
Robert Hayes, Consultant - Robert's domestic areas of expertise include Energy, both Dollar and Non-Dollar Fixed Income and Foreign Exchange markets. Robert has also developed securities markets in Argentina, Brazil, Mexico, Turkey and numerous other countries. Robert served as Chief Operating Officer of TradeSpark,L.P. since 2000 and was instrumental in positioning TradeSpark as a leading provider of execution and processing services in the energy industry. In addition to his responsibilities at TradeSpark, Robert also served as a Senior Vice President at Cantor Fitzgerald from 1996 to 2004, where he was responsible for front office management and business development in markets throughout North America, South America andEurope. Prior to joining Cantor Fitzgerald, Mr. Hayes served 15-years with Commonwealth Metal, an international broker of semi-finished metal products where he last served as Vice President of Finance and Administration.

Bob Stark, VP Product Strategy - Kyriba CorporationBob Stark is responsible for global product strategy and market development at Kyriba. Bob is a 15 year veteran in the treasury technology industry having served in multiple roles at Wall Street Systems, Thomson Reuters, and Selkirk Financial Technologies including product management and strategy. Bob is a regular guest speaker at treasury conferences and an active member of the Association for Financial Professionals.

Robert D. Pierson, Director – Kyriba CorporationRobert Pierson is currently the Director of Risk Management Services for Kyriba. Mr. Pierson has over 20+ years in the Treasury and Financial Derivative Markets working for and with companies such as Reval, Sungard, eSpeed, The Coca-Cola Companies, The Walt Disney Company, Ford Motor Company, and General Electric Corp. He is recognized and known as as an SME in systems implementation and process improvement for Financial Derivatives and Treasury Risk Management.

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Optimizing Hedging Programs: Assessing Risk and Achieving Compliance Presentation Transcript

  • 1. Optimizing Hedging Programs:Assessing Risk and Achieving Compliance Sponsored by Kyriba Bob Stark, Vice President, Strategy, Kyriba Robert Pierson, Director Risk Management, Kyriba April 11, 2013
  • 2. Introductions Today’s Presenters Robert Pierson Director, Risk Management Kyriba rpierson@kyriba.com Bob Stark Vice President, Strategy Kyriba bob.stark@kyriba.com© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 2
  • 3. Today’s Topics 1) Types of Hedging Programs 2) Steps to Build an Effective Hedging Program • Visibility • Assessing the Risks • Regulatory concerns 3) How Technology can help© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 3
  • 4. Types of Hedging Programs
  • 5. Assessing the Risks: Identification Most popular hedging programs: • Cash Flow hedging • Balance Sheet • Fair Value *Visibility* • Net Investment© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 5
  • 6. Assessing the Risks: Identification Most popular hedging programs: • Cash Flow hedging  Program to hedge a Highly Probable or Anticipated Assets/Liabilities  Can be applied to IR, FX, and Commodity exposures *Visibility*  Requires Regression for Assessment in Effectiveness Testing  Flexibility when releasing to OCI© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 6
  • 7. Assessing the Risks: Identification Most popular hedging programs: • Balance Sheet  Most common and effective way of hedging intra-month Assets/Liabilities  Short Term Derivatives to hedge effectively between exposure periods *Visibility*  Anyone who has FX Exposure has need for a Balance Sheet Program  Exposures typically drawn from ERP© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 7
  • 8. Assessing the Risks: Identification Most popular hedging programs: • Fair Value  Program to hedge a Firm Commitments or “Booked” Assets/Liabilities  Apply to Interest Rate and ‘recognized’ FX Exposures *Visibility*  Very difficult to get Fair Value treatment on Commodity hedges© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 8
  • 9. Assessing the Risks: Identification Most popular hedging programs: • Net Investment  Program to hedge an investment or funding in a foreign subsidiary or business unit  Often combines Fair Value Hedging for FX and Interest Rate exposure *Visibility*  Cross Currency Swaps popular to Hedge Net Investment© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 9
  • 10. Steps to Build anEffective Hedging Program
  • 11. Steps to build an effective hedging program Effective Hedging Programs: 1) Visibility: Knowing your exposures 2) Assessing the Risks 3) Choice of Hedging Instruments *Visibility* 4) Regulatory concerns© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 11
  • 12. Visibility What is the barrier? 50+% of financial executives cite visibility into data as the barrier to effectively forecast risk metrics Source: 2013 AFP Risk Survey© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 12
  • 13. Visibility How to hurdle the barrier? 1) Consolidate data in one central repository 2) If forecasting…refine accuracy to build confidence in the data 3) Implement technology (if needed) • Integrate ERP • Recurring models • Remote users© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 13
  • 14. Assessing the Risks What are the Risks? • Exposures  Payables vs. Receivables  Debt vs. Investments • Positions *Visibility*  Cash vs. Liquidity • Forecasting  Actuals vs. Projections© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 14
  • 15. Assessing the Risks Best Practice: • Manage what is known…  Payables, Receivables, Debt, and Investments  Cash Position  Derivative Position • Accurately forecast what is unknown…  Future payables and receivables  Market Condition impact on Cash and Derivative positions  Regulatory impact on Balance Sheet and Income Statements© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 15
  • 16. Choice of Hedging Instruments Most popular hedging instruments: • Futures  Guaranteed Settlement – Cleared by the exchange  No Counterparty Risk  Heavy Collateral requirement  Fixed Notional Amounts *Visibility* • Forwards  No Collateral Requirement  Exchange of Principal on Maturity Date  Can simulate a Future without the Fixed Notional Amount© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 16
  • 17. Choice of Hedging Instruments Most popular hedging instruments: • Swaps  No Collateral Requirement (yet)  No Principal Amount or Cash outlay for Start/End of Contract  Net Settlement *Visibility* • Options  No Collateral Requirement  Incur a cost due to time value (impact for hedge accounting)  Not an obligation but a Right to Buy or Sell  Can expire without incurring Realized Gains or Losses© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 17
  • 18. Regulatory Concerns
  • 19. Regulatory Concerns • A variety of regulatory requirements for different global regions  FASB = United States  IASB = Europe  IFRS = “both”  Dodd-Frank = United States • These regulations drive hedging actions for many corporates© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 19
  • 20. Regulatory Concerns FASB • Long Haul or Bust • Cost vs. Benefit • Future of Hedge Accounting  Convergence of US GAAP vs. IFRS • Consolidation Reporting for Foreign Currency (FASB 52)  Translation in a Hyperinflationary Economy  Translation in a Foreign Operation  Net Investments vs. Intercompany Loans© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 20
  • 21. Regulatory Concerns IAS and IFRS • Assessment vs. Measurement  Perform prospective hedge effectiveness assessment  Retrospective is in the Past • Rebalance the hedge relationship, when necessary • De-designate when risk objective changes • Voluntary de-designation is not permitted • Fair Value and OCI and Ineffectiveness  Hedge Accounting reflected as a separate Balance Sheet Item© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 21
  • 22. Regulatory Concerns FASB vs. IASB • Intentional vs. Interpretation  Guidance by FASB, Implementation by Advisors  Implementation by Preparers and Auditors • FAS 157 vs. IAS 37 • Fair Value Hedging  Entry Price vs. Exit Price  Exposure Draft • Cashflow Hedging  No Changes© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 22
  • 23. Regulatory Concerns What is the best practice? • Unlikely that treasury or finance has control over what regulatory framework you follow • Better to be over compliant than under compliant  Doing too much is inefficient; doing too little incurs regulatory problems‘ • Prospective and Retrospective Testing  Prospective provides visibility if the hedge will be effective  Retrospective proves that your hedge is effective • Auditors can provide guidance© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 23
  • 24. How Technology Can Help
  • 25. How Technology Can Help Quality Data + Quality Analysis = Better decisions Technology can help consolidate: • Visibility into Cash • Visibility into Exposures *Visibility* • Visibility into Market Conditions (Rates/Prices) Technology can help analyze: • Impact on cash flow • Impact on profitability • Impact of changes in assumptions© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 25
  • 26. How Technology Can Help Risk Analysis Most popular techniques measure potential impact Technique Requirements Common Market Data Curves Scenario/Sensitivity Analysis MTM of Derivatives *Visibility* Advanced Simulation Models Value-At-Risk (VAR) (Monte Carlo) CashFlow-At-Risk (CFAR) Correlation© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 26
  • 27. How Technology Can Help What kind of tools are you looking for? Two categories: 1) Workflow 2) Analytics *Visibility*© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 27
  • 28. How Technology Can Help What kind of tools are you looking for? Two categories: 1) Workflow • Treasury Management System (TMS) • Treasury ‘Risk’ Management (TRM) *Visibility* Goal: Complete workflow of: • Exposure management • Trade portal integration • Valuation • (Hedge) Accounting© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 28
  • 29. How Technology Can Help What kind of tools are you looking for? Two categories: 2) Analytics • Market Rates • Market Information *Visibility* • Valuation • Exposure optimization • Risk metrics • Reporting & Dashboards • Business Intelligence© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 29
  • 30. Summary Types of Hedging Programs Cash Flow Balance Sheet Fair Value Net Investment Building an Effective Program Technology Visibility is paramount Enables better decisions Properly assess risks Two types of systems: Optimize choice of derivatives workflow and analytics Regulatory Concerns FASB IAS IFRS Dodd-Frank© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 30
  • 31. Survey Report DOWNLOAD Kyriba-sponsored survey report “Treasury and Risk Management: Top Financial Risks and Tools to Manage Them “ from Aberdeen Group. Contact Us:© 2013 Kyriba Corporation. All rights reserved. PRIVILEGED & CONFIDENTIAL. 31
  • 32. REQUEST A CONSULTSATIONCFOs and Treasury Professionals from over 700 companies world-wide rely on Kyriba for: • Enhanced visibility into cash, forecasts, positions and exposures • Better financial decision making, including Cash Optimization and Hedging • Centralization of processes and controls • Effective 360 reporting and moreKyriba’s cloud-based treasury management solution offers a broad range of functionality tosupport even the most complex treasury requirements, solving the cash, treasury, and riskmanagement needs of all sizes of treasury and finance organizations.REQUEST A CONSULTATION TODAY: http://www.kyriba.com/request-demo
  • 33. THANK YOU FOR YOUR INTEREST!