BALANCE SHEET HEDGING

Effective balance sheet hedging involves at least three main tasks: measuring the impact of FX rates on non-functional currency monetary assets, forecasting these assets in advance so they can be hedged, and finally, ensuring that liquidity provision (whether in local currency [LC] or functional currency [FC] as required) does not affect the balance sheet adversely. If the company also operates a cash flow (revenue/expenses) hedging program, efficiently integrating the CF program into the BS program becomes the fourth task.

  • Do you still use a daily or average rate when remeasuring non-functional currency items?
  • Do you ever leave cash denominated in foreign currency because the current rate is unfavorable?
  • Do you use a snapshot of, or trend your current balance sheet to forecast next month’s balance sheet for hedging purposes?
  • Do you execute spot trades to meet liquidity needs?
  • Has your balance sheet hedging activity ever produced anomalous or hard-to-explain results?
  • Is your balance sheet hedging program costing more than you expect?

If you answered yes to any of these questions, then Currency Risk Management can improve your balance sheet hedging results.
 
Effective balance sheet hedging requires measuring the impact of FX rates on non-functional currency monetary assets (per FAS52), forecasting these assets in advance so they can be hedged, and ensuring that liquidity provision (whether in local currency or functional currency as required) does not adversely affect the balance sheet. This requires accurate balance sheet forecasting, and a sophisticated understanding of the interactions between accounting rates, exposures and hedges.
 
CRM’s solution uses a robust process that precisely forecasts and hedges balance sheet remeasurement risk, and provides functional currency liquidity without ANY balance sheet impact (1). Unlike complex and expensive Software-as-a-Service systems intended for the largest corporations, our solution utilizes an in-house software platform, so your busy IT team doesn't have to implement new systems.
 
With only three data exchanges per month to determine exposures and appropriate hedging activity, your finance team is not overloaded with data management chores.
 
The result is a perfectly-hedged balance sheet, and a finance team focused on your core business instead of FX.

To learn how CRM can eliminate FX risk from your balance sheet, contact us today.

(1) This process is adapted from one originally created by Jonathan Tunney and Gavin O'Donoghue of Atlas Risk Advisory.

Balance sheet re-measurement process