Le magazine du trésorier - n°72 - 4ème trimestre 2010 - (Page 22)

FORUM OF ADVERTISERS “FX Currency Hedging: Applying Cash flow at Risk (CFaR)” hile globalization has promoted increased trade and corporate expansion, it has also created new currency exposures, the volatility of which has made company profits more uncertain. The Credit Crisis has exacerbated this currency volatility. These facts of corporate life have made FX risk management an ever-growing feature of the corporate treasury landscape. Almost all companies sourcing, manufacturing , or selling overseas are exposed to some currency risk, and to protect profits, they need to assess what and how much to hedge. Applying systematic methods to make these assessments, such as using Cash flow at Risk (CFaR) can be useful in making hedging decisions.To demonstrate, consider a US company that sells in USD and has expenses in USD, CAD and MXN (the latter two representing currencies used in the US company’s production and assembly facilities). The company expects the following cash flows at the end of one year: On a spot basis, this represents a forecasted 22.83% operating marDescription MXN/USD FX Spot Rate CAD/USD FX Spot Rate USD 12M Cash Rate MXN 12M Cash Rate CAD 12M Cash Rate W Description Currency Amount 1,000,000 -200,000 -4,000,000 -275,000 FX Spot Sales Revenue USD Admin. USD Overhead Production MXN Expenses Production CAD Expenses Profit $ USD Equivalent Amount 1,000,000 -200,000 13.00 0.96 -307,692 -264,000 228,308 gin. The company is subject to foreign currency risk via the MXN, and CAD expenses.Any unfavorable movement in either currency will impact operating margins, e.g. a 10% adverse movement in both MXN and CAD exchange rates reduces profit to USD $167,720 or 6.05% decrease in operating margin. The company would like to know how much of its margin is at risk and what the cost will be for locking in the margin at the start of the year. Assume that the company can only tolerate a 50% decrease in profit ($114,154 USD). The following data is provided: A rough estimate of the cashflow at risk can be calculated by multiplying the MXN and CAD expenses by their respective daily volatilities adjusted for a level of confidence Daily Volatility (%) @ 95% Confidence Level 13.00 1.7978307 0.96 1.5326135 0.97875% 0.0410706 5.52000% 0.0184565 0.83571% 0.0322538 FX Spot/Zero Rate and converting into USD. About USD $5,532 of the MXN expenses and USD $ 4,046 of the CAD expenses are at risk at the 95% confidence level.The daily FX risk is USD $ 9,578. Annually, this represents USD $ 152, 044, which is about 66.6% of the total forecast profit and more than the tolerated level.Approximate as it is, it is a useful upper bound of risk. A more accurate assessment of risk can be measured using Cash flow at Risk (CFaR) , which takes into account correlations between the currencies.This is shown in the table below. The CFaR results bear out the rough estimate, though it is less.The CFaR reflects the correlation between the different currencies – MXN currency risk is still greater than CAD currency risk. The relatively high correlation between MXN/USD and CAD/USD results in a lower contribution to CFaR than that of the rough estimate. The annualized CFaR is USD $129,331.31, which represents 22

Table des matières de la publication Le magazine du trésorier - n°72 - 4ème trimestre 2010

Couverture
Sommaire
EDITORIAL
- “Catch 22”, a synonym for Kafkaesque situations
FINANCIAL HIGHLIGHTS
INTERVIEW
- Mr. Johannes Heinloth, Global Head of Loan Syndications, BayernLB
FOCUS
- 10 years of IAS 39: what next?
- La réforme de la TVA, une vraie bonne idée ?
- Respirer, ça paie !
- An optimist sees the opportunity in every difficulty: is IFRS 9 an opportunity or a difficulty?
FORUM OF ADVERTISERS
- “FX Currency Hedging:Applying Cash flow at Risk (CFaR)”
- Working Capital Optimization, A focus on payables & trade credit management.
- La Fed et la Chine mettent l’Asie dans l’embarras
- Cash Management was yesterday, Cost Efficiency is key.
CORPORATE FINANCE
- Cinq questions à Philippe Lison, Administrateur-Directeur de Hamburg-Mannheimer Benelux
- 15 minutes with OtimO
TREASURERS' ASSOCIATIONS
- Deuxième Conférence CFO World : l’engouement des directeurs financiers luxembourgeois se confirme
- 14th IGTA Meeting & Semi-Annual EACT Meeting Geneva – October 2010
NEWS

Le magazine du trésorier - n°72 - 4ème trimestre 2010