Why technology is the key to optimized FX risk management – The Global Treasurer | Region & Cash

Despite all efforts by regulators to unite key international markets under the same framework, the pandemic, together with the resulting socio-political uncertainty, has begun to destroy the globalized financial infrastructure.

In turn, foreign exchange (FX) risk is growing rapidly for the many companies that trade multiple currencies.

Although FX volatility is one of the biggest challenges to organizations’ financial stability today, there are countless treasurers out there who are still not actively monitoring key risks.

Others, on the other hand, do this manually and laboriously or with unsuitable tools. As such, both large and small businesses continue to embrace avoidable pitfalls.

The Global Treasurer spoke to ION Treasury’s Jack Duffy to investigate the issue.

Rising inflation

Health crises aside, the pandemic has had an unprecedented impact on our economies. For starters, markets saw a sharp rise in savings as lockdowns continued and much of the population is stuck at home. This in turn led to an increasing demand for consumer goods. Major disruptions in production and supply chains, meanwhile, have further amplified these shifts.

Then, just as signs of economic recovery were beginning to appear, Russia invaded Ukraine, bringing even more chaos to both manufacturing and global supply chains. Political uncertainty in the region remains, resulting in an even stronger US dollar.

In response, governments are attempting to cool their respective economies by raising interest rates. Of course, the medium to long-term consequence of this overshadows companies of all shapes and sizes as they continue to navigate such turbulent waters.

Rising FX risk

While it is imperative for companies to increase their focus on their FX risk management, this is no easy task.

“It’s challenging to deal effectively with increasing volatility and complexity around the world,” Jack Duffy, product manager at ION, told The Global Treasurer. “And beyond that, the propensity for more complex instruments and different types of strategies [that were previously restricted to] the banking sector.”

For example, while there has been a particular focus on liquidity over the past two years, there has also been a surprising level of underinvestment in technology. As such, there are many companies out there that have yet to take the next step in their FX management to better address today’s turbulent environment.

Companies also face the problem of quantifying their exposure to risk. FX is different in that it touches every single point of a business; In each of these cases, an organization is exposed. As exposure increases, it becomes increasingly difficult to consolidate data, largely thanks to the different systems at play. “It all becomes a major headache very quickly,” adds Duffy.

Luckily, a top-notch integrator and a standard interface for the various systems involved allows everything to be consolidated into one format. This, in turn, helps treasurers understand and quantify their risks far better.

Sophisticated tools

To achieve this level of sophistication, automation is key. In addition to empowering treasury teams of all shapes and sizes, there is a clear financial benefit to consolidating a company’s view of its position across all risks, financial tools and internal policies.

Automating FX risk management also means that the day-to-day manual work that can take a lot of time and effort is no longer required. Instead, treasurers have the opportunity to conduct proper financial and performance analysis – real value-added work.

Further advantages can be achieved by using a Software as a Service (SaaS) solution. Not only can it simplify FX risk monitoring, but it can also improve hedge management by creating automated hedging schedules and built-in APIs that instantly pull all transaction data to create position summaries by risk, currency and tenor.

Duffy adds, “It’s always good to couple your market news with your FX risk as FX is a liquid market. Treasurers do this maybe 100 times a day, every single day, which gets very risky very quickly. So you need integrated access to really good market data and insights.”

A SaaS solution also allows individuals to reap the benefits of scaling. “Everyone gets the same upgrades; having the latest and greatest version means no risk of missing out.”

And there’s more to come. AI can further improve the validity of a company’s forecasts and decision-making. “It can suggest trades based on 100 different parameters, which can be mind-boggling for someone doing it in a spreadsheet,” Duffy tells The Global Treasurer.

It can even automate early draws, net forwards and market orders based on the predefined conditional criteria of the company’s choice. In addition, intelligent, integrated micro-hedging also addresses many of the inherent vulnerabilities associated with manual hedging processes.

No matter what size

Web-based, lightweight and easy-to-use, SaaS for FX management has long been used by small businesses. You also don’t have to worry about upgrades, which can be a daunting undertaking when a big project is underway.

On the other hand, larger companies have often felt the need to run an on-premise solution despite the difficulty of integrating all their data sources and systems in one place. But that is changing now. As hardware and server structures improve, SaaS becomes far more resilient and scalable.

Its performance has improved significantly over the past five years, while the benefits of automatic upgrades are a breeze for all types of organizations. As a result, more and more larger companies are also beginning to enter the space.

In essence, SaaS for FX management has become a key enabler for many companies. “We can provide you with market data, bank connectivity and access to [all relevant] platforms in a very standardized, concise way. And regardless of company size, shape, industry or form, they all use the same version and functionality; There’s a sense of community because we all speak the same language,” says Duffy.

Today’s economic landscape is daunting. Companies are faced with constant changes and growing currency risks. Luckily, they can arm themselves with the tools they need to wade through and come out the other side stronger, more resilient, and more profitable.

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