abc medical - fx management

21
RECOMMENDATIONS REPORT: ABC Medical Company Prepared for: ABC’s Treasury Department Prepared by: Michael Harris August 4th, 2015

Upload: michael-harris

Post on 15-Apr-2017

143 views

Category:

Documents


0 download

TRANSCRIPT

RECOMMENDATIONS REPORT:

ABC Medical Company

Prepared for:

ABC’s Treasury Department

Prepared by:

Michael Harris

August 4th, 2015

EXECUTIVE SUMMARY

Recommendations Report for ABC Medical Company

Prepared by Michael Harris

Volatile and unpredictable currency markets have caused unnecessary noise to ABC Medical

Company’s financial statements. The recently strengthening United States Dollar (USD) has

caused losses to net income for ABC and has decreased the earnings per share of its

shareholders. Although this effect has been, and continues to be, relatively immaterial to its net

income and earnings per share, it is important to consider in a company’s FX policies.

Additionally, with ABC’s active international expansion, it is becoming subject increasingly to

new and larger foreign currency exposures on a corporate and subsidiary level. The proper

foreign currency (FX) policies and practices will help mitigate exchange rate risk and cost, while

neglecting these practices will result in swings in ABC’s financial statements. A proper FX

program will allow ABC to actively manage its core business practices without worrying about

the effects of the FX market.

A major strength of ABC is its choice in subsidiary location. With recent acquisitions it has a

large presence in China whose currency is not volatile. This allows it to transact in a country

with promising opportunities for business expansion that also has little FX risks. ABC’s large

quantity of transactions, and the size of those transactions, allow it to get competitive pricing that

rivals corporations much larger than ABC. Additionally, its centralized treasury allows it to save

not only on its transactions, but in management costs. This strong centralized treasury will

provide a base for the execution of additional FX practices that will bring additional benefits to

the firm.

The largest weakness keeping ABC from mirroring its larger competitor’s FX practices is its

absence of a hedging program. To start a hedging program it will need to be comfortable with its

visibility into its exposures. It can do this through an automatic report from its Enterprise

Resource Planning (ERP) system, or through its subsidiaries reporting its individual exposures.

With both an automatic report and with each entity reporting its exposures, great care should go

into verifying the integrity of the data on an ongoing basis including verifying the rate exposures

were posted at.

ABC will needed to ensure the costs of the hedge are minimized. The cost of the hedge is

measured by the forward points, market spread and minimizing the volume traded. Similar to

pricing is the timing of the hedge. ABC will need to check for changes in its FX exposures on

daily basis to ensure its hedge is capturing all of its exposure. It should only hedge if the net

change in its exposures are above predetermined threshold. If ABC does not do this, it can expect

larger inefficiencies in remeasurement.

In addition to maximizing the trading portion of its exposures, it will need to utilize hedge

accounting treatment to properly reduce the noise on its financial statements. For forecasted

transactions and firm unrecognized commitments above 2 million United States Dollars (USD),

it should hedge those items and classify it as a cash flow hedge. For all other exposures, ABC

will hedge it once it is stated on the financial statements. By following this model, ABC will

reduce gains and losses due to forward points and to posting and trading at different spot rates.

1

Recommendations Report for: ABC Medical Company Prepared by Michael Harris

INTRODUCTION

Since its inception, ABC Medical Company1 has emerged as a global leader in diversified

medical technologies. A key component to its growth has been its merger and acquisitions

practices, especially in international markets. This has allowed it to effectively enter into new

global markets and obtain new product offerings. Growth in international markets introduces

new risks for companies, primarily FX risk. FX risk management will primarily effect both the

accounting and treasury functions of a company, but will reach into purchasing, sales, and the

finance functions of a company. How companies manage the risks that are associated with

international growth greatly influences profitability, efficiency and ability to continue expansion.

Since 2011, ABC’s main acquisitions that have exposed it to FX markets have been International

Subsidiary Co., and Beijing Subsidiary Company in China, and the multinational corporation

International Subsidiary, Inc. based out of San Diego.2 The two Chinese acquisitions has given

ABC a considerable market share in the Chinese market, which market share is a core strength.3

The acquisition of International Subsidiary, Inc. not only increased its product offerings, but it

also increased the sales basis and distribution network for the company worldwide. ABC has

subsidiaries throughout the world, with functional currencies of the Great British Pound (GBP),

Euro (EUR), Swedish Kroner (SEK), Australian Dollar (AUD), Chinese Yuan (CNY) and

Japanese Yen (JPY).4 It also has manufacturing facilities in Germany, England, Canada, and

China, leading to additional exposures in EUR, GBP, Canadian Dollars (CAD) and CNY.5

During fiscal year 2014 twenty-five percent of all sales were outside of the United States.

The company has a central treasury function that moves trades through the market. Since its

treasury is strongly centralized it is able to net exposures together and reduce volume out of the

market. The ability to net like currency pair exposures gives ABC a cost advantage when trading

currencies. Once it starts a hedging program it can expect is earnings to stabilize and the firm’s

value to increase.

1 This report was originally written for a writing class I attended during the summer of 2015. The subject of this paper was a multinational company whose treasurer, after reviewing the paper, asked that I remove content that put the company’s foreign currency practices in a negative light. Additionally, she asked that I make the company, and its subsidiaries anonymous. To comply with her wishes I made the changes and as such some of the references are inaccurate. If the reader wishes to have the original references, or has any questions and comments, please contact me at [email protected]. References to ABC Medical Company, and its subsidiaries, are now purely fiction and any existing companies with the same names are purely incidental. 2 MarketLine, “ABC Medical Company MarketLine Company Profile”, February 2015, Business Source Premier,

EBSCOhost, accessed on July 12, 2015 3 MarketLine, “ABC Medical Company SWOT Analysis”, February 2015, Business Source Premier, EBSCOhost,

accessed on July 12, 2015 4 MarketLine, “ABC Medical Company MarketLine Company Profile” 5 ABC Medical Company 2014 10-K, <http://investors.ABCMedical.com/index.php?s=127&year=2015&cat=2>,

accessed on July 12, 2015

2

STRENGTHS

Subsidiary Locations

One of the strengths of ABC’s FX portfolio is its large exposure to the CNY. For decades

leading up to 2010 China pegged its currency’s exchange rate to the USD, at which time it has

then pegged its currency to an undisclosed basket of currencies. Even though the CNY is no

longer pegged to the USD, China still maintains a “dirty float” and there is very little movement

in the exchange rate when compared to other major currencies.6 This beneficial for ABC because

it has a lower risk of price movements, meaning if it has an exposure to CNY on its balance

sheet, there is little risk of it drastically changing its value.

This “dirty float” has manipulated the USD/CNY exchange rate so that the CNY is highly

undervalued. Some estimates have the CNY undervalued by 30% - 40% within the last two

decades.7 An undervalued CNY will result in a general increase in sales in China due to

increased exports, however, it will also reduce the amount of profits repatriated back to ABC’s

headquarters. This is because it will take more CNY to purchase the same amount of USD. For

ABC specifically, an undervalued CNY is both positive and negative. For expansion in China it

is very beneficial because it becomes cheaper to invest into new companies or expand existing

operations. This is negative, however, for repatriating funds back to headquarters.

From a risk management perspective, having a Chinese presence is an advantage because the

currency is not very volatile against the USD (see Figure 1) but ABC still is able to increase its

foreign market share. Although the company is still exposed to FX risk, including laws making it

difficult to move money in and out of the country, the low volatility smooths out transaction

gains and losses, and makes FX gains and losses more predictable. Part of any sophisticated

corporate FX policy is the consideration of which countries will increase earnings while keeping

risk at a minimum.

6 Heikki Oksanen, “Re-pegging the renminbi to a basket: issues and implications”, Asian-Pacific Economic

Literature, Vol. 26 Issue 1, May 2012, p18-33, Business Source Premier, EBSCOhost, accessed on July 13, 2015 7 Bob Davis, “Undervalue/Overvalue: The Great Yuan Debate Continues”, The Wall Street Journal, May 13th, 2014, <http://blogs.wsj.com/chinarealtime/2014/05/13/undervalueovervalue-the-great-yuan-debate-continues/>, accessed on July 31st, 2015

3

Figure 1:8

The USD/CNY exchange rate’s volatility (orange) is compared to the EUR/USD exchange rate’s volatility (blue)

China’s laws that restrict movement of money into and out of China have been lessened with the

recent introduction of a new offshore currency, the CNH. The introduction of the CNH allows

foreign companies to actively buy, sell and hedge the CNY though the CNH. The two currencies

are highly correlated, and transactions between the CNY and CNH are easier than between the

USD and CNY. Because the CNY is often a “Non-Deliverable Currency” for hedging purposes

and the CNH is not many companies are utilizing the ability to hedge CNH and then converting

directly into CNY. With the introduction of the CNH ABC is better able to manage its risk and

cash flows into and out of China.

Large Volumes Traded

Another strength to ABC’s FX policies is the volume it transacts on an annual basis. The

company uses a platform in which it competitively bid its transactions between multiple

counterparties. Through this trading platform it is able to competitively bid its exposure to its

different providers. When a company bids out its exposures it usually receives very tight pricing

from its counterparties.

Its current practice is for the corporate treasury to transact all exposures over a nominal amount.

This is beneficial from a practical standpoint because it allows the corporate treasury to net

exposures together and bring larger trades to the market. Because it is able to trade these large

exposures, its counterparties will give better rates. Having a nominal threshold also reduces the

amount of work required for the central treasury. If the treasury were to manage all of its

subsidiaries’ exposures, regardless of size, it would then start to over work itself. The cost for the

central treasury to trade small nominal amounts is not worth the price savings.

Additionally, with larger volumes companies will usually have the ability to net like currency

pair exposures together. This allows a company with a subsidiary that needs to buy EUR and a

subsidiary that needs to sell EUR to reduce volume by combining the inflow and outflow of EUR

together and only trading the difference. This practice will take unnecessary volume out of the

market so that the company is not paying the bid/ask spread on the smaller amount.

Historically ABC has had large cash reserves which is beneficial for many different reasons. It is

particularly beneficial for firms who are actively trading amongst many different counterparties

and for firms that are hedging. Typically when a firm is trading among many different

counterparties it can require large outflows and inflows of cash to settle various spot and forward

contracts. Additionally, if the company is hedging exposures, and swaps the contracts to a later

date, it can expect large settlements with each bank. If ABC pursues a hedging program its large

cash reserves will provide the crucial liquidity required to settle with its counterparties.

Centralized Treasury Management

8 “USDCNY Spot Exchange Rate,” Bloomberg Business, Five Year Graph,

<http://www.bloomberg.com/quote/USDCNY:CUR>, accessed on July 29, 2015

4

Another strength of ABC’s FX management practices is its strong centralized treasury program

that manages all of its and its subsidiary’s FX exposures. One of the world’s best examples of a

properly functioning centralized treasury programs is that of one of ABC’s competitors, GE

Heathcare. GE Healthcare’s FX exposures are all managed by its parent, General Electric (GE).

GE has an award willing team of treasury professionals that manage FX exposures for every

subsidiary with an annualized cost savings of roughly $10 million.9,10 GE even bought several

banks to more fully utilize its treasury function.

GE’s centralized treasury manages all cash balances and risk that each of the subsidiaries are

exposed to. The benefits are twofold. Not only does it allow for cost savings by consolidating the

practice in one location, but it allows a single group to become experts and implement best

practices amongst the firm’s subsidiaries. The risk of having a decentralized treasury is that

subsidiaries might not implement best practices. ABC’s corporate treasury function currently

manages all of its subsidiary’s FX exposures.

Centralizing the use of derivatives is important if ABC pursues a hedging program. In his

research, Håkan Jankensgård finds that centralizing the use of derivative contacts will increase

firm value by 15% over those who have a decentralized hedging policy.11 This is due to the gain

in scale of pricing power and natural hedges inherent in the company’s exposures. Hedge

accounting treatment allows a centralized treasury to trade the net exposure with a counterparty

and issue internal derivatives for each of its subsidiaries. This allows for a strong centralized

treasury while allowing each subsidiary to have specific hedges to properly offset its exposures.

If ABC can aggregate all derivatives and trade the contracts at one location it can negotiate

smaller spreads from its counterparties. Additionally, if each subsidiary location enters into spot

or derivative contracts separately, it will book offsetting contracts, thus putting the company on

both sides of the bid/ask spread.

WEAKNESSES

Hedging

ABC does not engage in any hedging activities,12 although it has done so it the past.13 Recently

with a strengthening dollar many US corporations, including ABC, have blamed “currency

headwinds” as the cause of diminishing profits.14 Hedging those exposures would have protected

its earnings and resulted in minimal FX gains and losses. All FX exposures can be mitigated

9 Treasury and Risk Management, “GE’s Treasury Strategy”, April 2001, Business Source Premier, EBSCOhost,

accessed on July 12, 2015 10 Treasury and Risk Management, “FX Power: General Electric Co.”, November 2008, Business Source Premier,

EBSCOhost, accessed on July 12, 2015 11 Håkan Jankensgård, “Does Centralisation of FX Derivative Usage Impact Firm Value?”, European Financial

Management, Vol. 21 Issue 2, March 2015, p309-332. 24p., Business Source Premier, EBSCOhost, accessed on

July 13, 2015 12 ABC Medical Company 2014 10-K, <http://investors.ABCMedical.com/index.php?s=127&year=2015&cat=2>,

Page 26, accessed on July 12, 2015Ibid. 13 ABC Medical Company 2006 10-K, <http://investors.ABCMedical.com/index.php?s=127&year=2015&cat=2>, Page 46, accessed on August 5, 2015. 14 ABC Medical Company, “ABC Medical 1QFY15 Financial Results Conference Call Prepared Remarks”, January

28th, 2015, accessed on July 30, 2015

5

through a hedge resulting in reduced earnings volatility. Losses to do “currency headwinds”

result in actual losses to net income and earnings per share, which losses are completely

manageable.

The goal of hedging is to reduce risk and is never speculative in nature. Firms that use

derivatives for speculative purposes loose the confidence of its investors and can quickly accrue

large losses. A firm should have rules in its FX policy as to when to hedge, which hedges are

appropriate and when to stop hedging. A firm may use option contracts to reduce losses and

maximize gains, however, it should be within the guidelines set forth in the FX policy.

A perfect hedge will protect ABC from all losses and allow for unlimited upside potential in

gains. Option contracts are ideal hedges, although sometimes it is expensive and requires a

capital exchange upfront. Future contracts are poor hedges because it requires continual capital

adjustments into and out of margin accounts. Forward contracts produce the same results as

future contracts but without the constant capital adjustments. Additionally, currency swaps are

another viable option to hedge currency exposures, but are “a series of forward contracts

packaged together.”15 A viable strategy is to use forward contracts to initialize a hedging

program and when ABC receives a large settlement from swapping out of its exposures, to use

that settlement to purchase option contracts. This would provide a transition for ABC to hedge its

exposures through option contracts through additional capital it has received from favorable

market positions. It would also allow it to lock in a more favorable rate while still allowing for

upside potential.

Multiple sources have found that hedging FX exposures will reduce exchange rate risk,16 and

will tend to increase firm value.17,18 Similar research also finds that “firms with strong corporate

governance use derivatives in a way that is beneficial to firm value and therefore adds to the

nascent literature on the channels by which corporate governance increases firm value.”19

Research outlines that “derivative use… is beneficial to firm value,” not when a firm speculates

or pursue management’s self-interests, but when it hedges known exposures.20 When hedges are

focused on known exposures it tends to reduce earnings and cash flow volatility.

ABC’s top competitors hedge its exposures. Phillips Heathcare, a direct competitor based out of

Europe, hedges just over 93% of all its foreign currency exposures.21 More specifically, Phillips

15 TCX The Currency Exchange Fund, “Fx Forwards and Cross Currency Swaps”, <https://www.tcxfund.com/products/fx-forwards-cross-currency-swaps>, accessed on August 4th, 2015 16 Feng-Yi Chang, Chin-Wen Hsin, Shin-Rong Shiah-Hou,“ A re-examination of exposure to exchange rate risk:

The impact of earnings management and currency derivative usage”, Journal of International Economics, Vol. 87

Issue 1, May 2012, p65-79. 15p., Business Source Premier, EBSCOhost, accessed on July 13, 2015 17 Håkan Jankensgård, “Does Centralisation of FX Derivative Usage Impact Firm Value?”, European Financial

Management, Vol. 21 Issue 2, March 2015, p309-332. 24p., Business Source Premier, EBSCOhost, accessed on

July 13, 2015 18 Francisco Pérez-González, Hayong Yun, “Risk Management and Firm Value: Evidence from Weather

Derivatives”, Journal of Finance, Vol. 68 Issue 5, October 2013, p2143-2176, Business Source Premier,

EBSCOhost, accessed on July 13, 2015 19 George Allayannis, Ugur Lel, Darius Miller, “The use of foreign currency derivatives, corporate governance, and

firm value around the world”, Journal of International Economics, Vol. 87 Issue 1, May2012, p65-79. 15p., Business

Source Premier, EBSCOhost, accessed on July 13, 2015 20 Ibid. 21 Phillips Heathcare. 2014 20-F,

<http://www.philips.com/about/investor/financialresults/annualreports/index.page>, accessed on July 14, 2015

6

utilizes hedge accounting under IFRS 9 which allows it to put unrecognized gains and losses in

other comprehensive income to smooth out earnings, and to gain visibility into future gains and

losses at the onset of the hedge.22

Companies like ABC cannot limit its business dealings in only one currency. Not only does ABC

have subsidiaries around the globe, it has many business partners and clients who transact in

different currencies than ABC. Having the ability to competently transact in multiple currencies

establishes credibility in international markets, and can increase a company’s customer base.

Offering clients the ease of use to transact in its functional currency is important to any

multinational company wishing to satisfy its foreign customers. Hedging these exposures is

critical towards maintaining a global presence.

With increased visibility through an ERP report, ABC will know what exposures it needs to

hedge, both on a corporate and subsidiary level. Typically intercompany exposures are

reasonably visible to a company’s headquarters and are typically one of the first items hedged.

This is also beneficial because hedging intercompany FX exposures receives special hedge

accounting treatment that is not afforded to other derivatives and their underlying exposures.

RECOMMENDATION - Implement a Hedging Program

Background and Rationale

In this recommendation section, when hedging is referenced to it is in the form of forward

contracts. ABC may also hedge with option contracts, however, option contracts are less

traditional to hedge balance sheet exposures. Additionally, option contract usually require an

exchange of cash on the onset of a hedge, which would become burdensome to manage with a

comprehensive hedging program, as is described here. Option contracts are a viable option if it is

used to hedge a balance that will not change and ABC is willing to pay a premium for the option

contract.

The two areas ABC will protect with a hedging program are its earnings and its cash flows. Its

earnings will be protected because its assets and liability will have offsetting exposures that will

reduce the impact of rate movements. If ABC hedges its exposures, it will protect its cash flows

because ABC can plan with certainty what rate it will use when it settle its contracts.

Hedging will affect many areas of ABC’s practices, including banking relationships and

accounting. Creating a FX policy that covers its FX hedging practices is completely achievable

at minimum costs. Typically, the biggest obstacle for a company obtaining an efficient FX

hedging program is the lack of knowledge and experience and a corporate culture that is averse

to change.

There are four distinct categories for hedging purposes and each one can receive different

accounting treatment: 1) Payables and receivables denominated in a foreign currency, 2) firm

unrecognized commitments in other currencies, 3) highly probable, or forecasted, transactions

denominated in a foreign currency, and 4) net investments in foreign subsidiaries.

22 Robert G. Rambo, Daphne Main, Louis Beaubien, “Reducing reporting risk Designating foreign currency forward

contracts as cash flow hedges”, Journal of Accounting Education, Vol. 29 Issue 4, December 2011, p284-294. 11p.,

Business Source Premier, EBSCOhost, accessed on July 13, 2015

7

Payables and receivables denominated in a foreign currency are items that are recorded on the

balance sheet. This includes cash, payables, receivables, and available for sale securities. Firm

unrecognized commitments are transactions that are highly probable to occur and if the

transaction fails there is an option for legal recourse. This is usually when there is a purchase

order and sales invoice, but revenue or expenses are not recognized on the entity’s financial

statements.

Highly probable transactions are transactions that are expected to happen. This includes

transactions that are in the closing stages of negotiation or future sales and expenses that are

projected to happen. It is important to note that if ABC hedges highly probable transactions and

the underlying fails to happen the hedge will cease to receive hedge accounting treatment. Net

investments in foreign subsidiaries allows a firm to hedge, in the functional currency of its

subsidiary, the net asset or liability of the same subsidiary. Because the gains and losses from

currency movements against a foreign subsidiary are captured in translation gains and losses, and

that is recorded in other comprehensive income, it is immaterial for ABC to hedge.

There are three pillars to any successful hedging program: 1) Obtaining and using correct data, 2)

Timing, and 3) Pricing. Correct data includes using both correct financial data that is free from

errors and using appropriate conversion rates. Timing is the frequency at which an entity adjusts

its hedges; the time between posting exposures and putting on hedges. This includes utilizing the

ability to hedge firm unrecognized commitments and forecasted transactions. Pricing is perhaps

the most subjective, but includes the forward points, the market spread, and minimizing volume

traded.

Visibility into Exposures

There are primarily two different ways to gain visibility, which is the first step in establishing an

effective hedging program. The first option is to use a report in ABC’s ERP system, Oracle,23

and the other is to have each subsidiary report its exposures. If ABC does not have a report that

shows its treasury its exposures, it will need to create one. For some companies creating a

custom report is costly and time consuming; these reports have been known to take up to a year

to create and verify for accuracy, although most companies can create the report relatively

quickly. The advantage of having a custom report is that, once created, it can significantly reduce

the amount of time to gather information.

Although there are several different types of reports ABC can use, it is best to use, and create, if

applicable, one that will provide as much information as possible. Maximum visibility through

this report is beneficial when testing for data integrity. The report should include both items that

have been posted to the general ledger, and items that have been entered and approved in Oracle

but have not been posted due to revenue recognition requirements. The advantage of this will

become apparent latter on in this recommendation. At the minimum, the report will need to

include the entity, account number and foreign exposure amount and currency for each account

and entity in the company. This report will allow ABC to start placing and updating its hedges

daily. For purposes of testing the accuracy of data, ABC will need to either include in the report,

23 Kerrie Jordan, “ABC Medical Speeds Launch of Innovative, Life-Saving Technology”, Oracle Webpage, <https://blogs.oracle.com/PLM/entry/ABC_speeds_launch_of_innovative>, October 9th, 2015, accessed on August 5, 2015

8

or have easy access to, each entry that makes up the account amount and the functional amount

that each item was posted at.

Although it is typically slower, having each entity report its exposures is a viable alternative and

is usually a preferred approach until an entity can reliably use an accurate report. If each entity

reports its exposures to a central location, usually the corporate treasury, ABC should have an

approval process to ensure each entity is reporting correct data. Since data entry is highly subject

to error, the approval process will help mitigate input inaccuracies. As tracking these exposures

through Microsoft Excel, Access or similar software products is difficult to manage, there are

different software providers that ABC should consider that offer the ability to facilitate both

processes to different levels, such as FiREapps, Hedge Trackers and GPS Capital Markets.

Once ABC is hedging its balance sheet items with its ERP report, it will still need to have each

subsidiary report unrecognized firm commitments that have not been inputted and approved in

Oracle. Additionally, each entity will need to report forecasted transactions, as these exposures

are not captured in the Oracle report. To hedge the items that are not recorded in Oracle, the best

approach is to set a USD threshold, 2 million USD being recommended, and have each entity

report that firm commitment or forecast. This threshold is calculated by taking roughly 0.05% of

the average of the last three years cash balances, net receivables and current liability amounts.

These accounts typically have foreign currency exposures, and ABC should adjust the 0.05%

number until it gains comfort that it is capturing all material exposures.

Forecasted transactions can develop into a large portion of ABC’s hedging program, but initially

it should only include transactions that are likely to close. Eventually, depending on its appetite

to stabilize cash flows, ABC can expand its forecasted hedges to include a broader range of

potential exposures, but that is beyond the scope of this recommendation.

Data Integrity

ABC should periodically review its reports and manual inputs for accuracy. A method for

verifying data is by looking for large fluxuations in GL accounts from period over period.

Fluxuations over a certain USD amount and percentage will require further investigation; in

ABC’s case, 250,000 USD and 10% are recommended. These amounts are calculated by taking

0.01% of the average total revenue amounts for the last three years. Again, ABC can adjust these

numbers until it has a material number it is comfortable with. For any fluxuations above these

limits, ABC should obtain an explanations and if an error is found ABC should correct it.

Another integral element to having correct data is ensuring exposures have been posted at correct

rates. This is done by checking that known exposures have been posted at a rate that is within the

trading range of the day. Forecasted and firm unrecognized exposures that have been hedged

should post at the spot rate the offsetting hedge was entered into, in addition to any gains or

losses due to market fluxuations. This concept is covered in depth in the “Accounting” section of

this recommendation. Without visibility into correct data any hedging program, no matter its

virtues, is worthless.

Timing

Ideally as each exposure comes on and off the balance sheet the hedge is adjusted. It is not

practical to capture all changes because some exposures are so small that any gain or loss is

immaterial and is not worth the effort that goes into a hedge. To effectively take care of this,

9

ABC should only trade a balance if its net exposure’s USD amount is over a certain threshold,

250,000 USD being the recommended amount for the same reasons explained above.

Additionally, it will only adjust its hedge if the change in exposures is greater than 250,000

USD. This threshold will also prevent immaterial trades from being entered into.

The change in exposure is measured by taking the exposure amount for each currency amount

and subtracting the amount of hedges outstanding with the same currency pair. Debit balances

are positive whereas credit balances are negative for calculations. Additionally, ABC will need

to include the exposures of all subsidiaries for an effective hedge. This will sometimes require

assigning an arbitrary rate if two entities have the same currency pair exposure but opposite

functional currencies.

This rate should match the rate it uses to hedge the contract, or a best estimate of what rate ABC

will hedge at, as that will exactly represent the hedge. If the remaining amount is a net debit, or

positive, exposure then ABC will enter into a contract to sell that amount. If the remaining

amount is a credit, or negative, balance then ABC will enter into a contract to buy that amount.

When placing the hedge with ABC’s counterparties it is important that it trades the net exposure,

to save volume. ABC is then able to enter into its own internal derivative contracts with its

subsidiaries so that its subsidiaries gains and losses are offset. During consolidation ABC will

need to eliminate all intercompany hedging contracts from its financial statements.

ABC should take great care to include exposures that have not yet been recorded on ABC’s

balance sheet: firm unrecognized commitments and forecasted transactions. When ABC utilizes

hedge accounting, ASC 830 allows firms to use the forward rate when recording the hedged

exposures that are firm unrecognized commitments or forecasted transactions.24 Any changes to

the value of the underlying exposure is not recognized until the exposure has been recorded and

settled as long as ABC records the hedge as a cash flow hedge. This is important because if ABC

waits to hedge the exposure once it is on its balance sheet, it will have already posted the

exposure at a different rate than what it hedged at, and will immediately have to post a gain or

loss. When ABC posts its exposures it will do so at the rate it was hedged at.

ABC should check for changes in exposure every day. Although this can become tedious,

especially if ABC is submitting its exposures manually, it is crucial as changes in ABC’s

exposure are unprotected until it adjusts its hedge. This is important especially with instances

where there are larger changes in exposure in ABC’s balances and when there are large gains and

losses in the market between hedge adjustment intervals. It is common for currency markets to

move over 1% in a day, and in the recent case of the Swiss Franc (CHF) removing its tie to the

EUR, the CHF strengthened 17.62% against the USD on January 15th, 2015 alone.25 A

theoretical 17% loss on a 10 million CHF exposure would result in a 1.7 million CHF loss, or

roughly 1.75 million USD.

Although some exposures will not change daily, it is beneficial to check for changes.

Additionally, doing this program daily will help bring to the central treasury’s attention the

changing exposures. When ABC is calculating all of its exposures manually, moving to a bi-

24 Financial Accounting Standard Board, “ASC 830”, Generally Accepted Accounting Principles, <https://asc.fasb.org/subtopic&trid=2175826>, accessed on July 12, 2015 25 “USDCHF Spot Exchange Rate,” Bloomberg Business, January 15th, 2015,

<http://www.bloomberg.com/quote/USDCHF:CUR>, accessed on July 29, 2015

10

weekly schedule, every Tuesday and Thursday, is appropriate. There are several software

providers that will help facilitate the calculation of changes in net exposure to one extent or

another such as FiREapps, GPS Capital Markets and Hedge Trackers.

Cost

The cost of the hedge in regards to the forward points is the effect of interest being paid or

received. The forward points are a result of the interest rate differential between the two

currencies. The forward points are traded with the interest rate desk at the bank. ASC 815-30-55-

108 through 55-112 instructs companies to amortize the forward points over the life of the

derivative.26

An additional costs to consider is the spread between the market and the rate ABC receives on its

derivative. Although this cost is offset by using the same spot rate to post ABC’s exposures at,

and hence not recognize it in its income statement, it will still reduce the cash balances of the

company as it is paying out more money at each settlement. It is important to know that

counterparties will tend to take its spread in the forward points when swapping the hedges for

even or roughly even amounts, and it will take its markup in the spot rate when entering into or

adjusting the hedges.

Counterparties take the markup in the forward points because even swaps, or near even swaps,

do not allow for profit between both settlements; whatever ABC would pay or receive on the first

settlement is offset by the second settlement. ABC’s advantage in this instance is that it has

seven counterparties to consider when placing hedges, and it has a Bloomberg portal to use to

verify rates are close to market.

Perhaps one of the most efficient ways to reduce unnecessary costs is by reducing volume traded

in the market. The most efficient way to do this is by recognizing natural hedges; if Subsidiary A

has a 1,000 EUR payable and reports in USD and Subsidiary B has a 1,000 EUR receivable and

reports in USD, the gains and losses on both contracts will completely eliminate each other

during consolidation as long as each entity is using the same rate. In the example above, ABC

would save 2,000 EUR worth of trade out of the market by netting similar exposures together,

and would not have to pay the bid ask spread. Positions can net within each subsidiaries balance

sheet into one net debit or credit amount. Additionally, ABC can net subsidiary exposures into

one corporate debit or credit amount. Each time ABC updates its hedges it should only trade the

change in net exposures.

Similar to netting exposures together is the practice of swapping the outstanding hedge balances

to a further date. Some companies, when the value date of its hedges come due, will enter into an

offsetting hedge and then after the settlement will enter into new hedges. This is very costly and

is not best practice. Counterparties will typically take a spread on the onset and the offset of the

hedge, thereby effectively doubling the spread that company pays. Best practice is, when the

hedges value date is coming due, swap out of the contract to a further date. ABC should try to

swap out of its hedges for spot value so it does not have forward points on its offsetting

contracts.

26 Financial Accounting Standard Board, “ASC 815”, Generally Accepted Accounting Principles, <https://asc.fasb.org/subtopic&trid=2175826>, accessed on July 12, 2015

11

When swapping a contract, the rate used to exit the existing contracts will determine the

settlement. If the swap is for an even amount, the settlement on the offsetting contract will match

what is received or paid on the new contract. If amounts are uneven, ABC’s counterparty will

mark up the net amount to make additional profits. Whenever swapping a contract, ABC should

strive to obtain a rate that is in-between the market bid and ask prices.

Another example of reducing exposure is by triangulating net debit and credit exposures

together. The triangulated method will always reduce the volume traded over additional hedges,

and will usually produce greater gains and reduce losses on hedges depending on the forward

points. ABC should not initially enter into a triangulated hedge because it is a relatively new an

unproven method. Through the triangulated method ABC would transact in currency pairs that it

has not exposure in, although it will use currencies that it transacts in.

A factor to consider with regards to price is the labor cost to enter into hedges. If ABC traded

every change in exposure individually, and not netted, the volume of contracts would become

bothersome and costly to enter into and keep record of. Additionally, the wire fees might cost

more than the potential benefit the hedge provides if the amounts traded are small enough.

Usually when a company trades high volumes of contracts for low amounts its counterparty will

increase the spread it makes on the transactions.

By setting trading thresholds ABC will reduces unnecessary trades from the market, save on wire

fees and maintain a tight market spread on its trades. As was mentioned before, the appropriate

trading threshold is anything above a 250,000 USD equivalent. Additional labor costs include the

effort to confirm contracts, and to send and receive payments when the contracts come due.

Fewer contracts will result in reduced labor costs and time savings because it takes the same

effort to enter into, manage and settle a large trade as it does for a small trade.

Theoretically the duration the ABC’s hedges should not matter because it will amortize the same

amount in forward points each month. This is untrue because counterparties will take a spread in

the forward points to make profits on the trades, especially on swaps. Because of this, it is

typically better to have longer durations on ABC’s hedges. However, after a month of hedging

ABC will have a difficult time managing the volume of contracts outstanding. Because ABC

receives such tight pricing from its counterparties it can have shorter durations with minimal

consequences. It is recommended that ABC enter into hedges with durations of one month to

avoid unnecessarily large amounts of outstanding contracts.

Because ABC has large cash balances it has the required liquidity to run a hedging program.

With each settlement, ABC should expected that it will either receive or send several million

dollars to its trading counterparties. This can become compounded when ABC updates its hedges

with multiple counterparties each hedging period. The ability to switch counterparties is crucial

when trying to maintain low pricing, however, it requires a lot of liquidity. As long as ABC

maintains large cash balances it should meet the restraints of its hedging program.

Accounting

The first item to consider when setting a hedging program is to ensure ABC is using appropriate

rates to post its exposures at, and how often it is updating those rates. ABC should update its

rates daily so that items are being posted at rates that are as close as possible to the rates ABC

enters into hedging contracts at. There are several different rate providers that ABC can choose

12

from, including Oanda, GPS Capital Markets and Yahoo Finance. ABC should use a rate service

so that it can both receive a rate file and upload it into Oracle, or so that it can feed directly into

ABC’s Oracle application. Additionally, ABC should give attention so that the rates are posted

within the high and low of the day, thereby verifying rate integrity.

When recording hedges ASC 830 allows for two different methods for treating gains and losses

on derivative contacts: the fair value method and the cash flow method.27 The journal entry

details are shown in Figure 2 for the fair value method, and Figure 3 for the cash flow method.

Figure 2:28

Note, this image is

from a website

explaining hedge

accounting in IFRS.

The principles are

the same for US

GAAP, however,

“FP” (Statement of

Financial Positions)

synonymous with

Balance Sheet.

Additionally, “P/L”

is an acronym for

Profit and Loss

Statement, or

Income Statement.

27 Financial Accounting Standard Board, “ASC 830” 28 Silvia M., “Difference Between Fair Value Hedge and Cash Flow Hedge”, IFRS Box, May 29th, 2014, <http://www.ifrsbox.com/difference-fair-value-hedge-cash-flow-hedge/>, accessed on July 30th, 5015

13

Figure 3:29

Note, this image is

from a website

explaining hedge

accounting in IFRS.

The principles are the

same for US GAAP,

however, “FP”

(Statement of

Financial Positions)

is synonymous with

Balance Sheet, and

“P/L” is synonymous

with Profit and Loss

Statement, or Income

Statement. “OCI” is

an acronym for Other

Comprehensive

Income.

For FX purposes, if the hedged item is a recognized asset or liability or if the hedged item is a

firm unrecognized commitment ABC can treat it as a fair value hedge. ABC can treat a

derivative as a cash flow hedge if the underlying item is a recognized asset or liability, a firm

unrecognized commitment or a forecasted transaction. For firm unrecognized commitments and

forecasted transactions above the threshold mentioned earlier, designating the hedge as a cash

flow hedge is preferable. Designating those items as a cash flow hedge is beneficial because

instead of posting the gain or loss on the hedge in the income statement, ABC should post it in

other comprehensive income which will not affect net income. Each of these forecasted

transactions or firm commitments being hedged will require separate documentation. Since there

is an increased amount of work to document each exposure, although the threshold will reduce

the amount of exposures hedged and hence the manual costs to track each exposure.

Once the unrecognized firm commitment, or the forecasted transaction, is recognized on ABC’s

balance sheet, ASC 815-20-25-34, ASC 815-30-35-9 and ASC 815-30-55-106 through 55-112

allows ABC to use the same derivative to continue hedging the exposure amount. 30 ABC will

able to record the exposure on its books at the spot rate, adjust the hedge to its fair market value

in accumulated other comprehensive income and move the entire gain or loss, less a portion of

the forward points, into the sales or expense account. ABC is allowed to bring the forward points

for the portion it was a forecasted and firm commitment into the sales or expense account. Once

the hedged item is settled, ABC will have perfectly offset the entire exposure, and with a

remaining gain or loss in other comprehensive income. This remaining gain or loss reflects the

forward points for the duration the exposure was on ABC’s financial statements, and will go into

an expense or income account. This reduces the gain or loss that results from the delay in posting

29 Ibid. 30 Financial Accounting Standard Board, “ASC 815”

14

and hedging the contract. Additionally, this method only records a gain or loss due to the forward

points for the time the exposure has been recorded instead of for the duration of the hedge.

For all forecasted transactions and firm unrecognized commitments that were not above the

threshold, it will eventually come onto ABC’s financial statements unhedged. For these

recognized assets or liabilities, it is recommended that ABC treats the hedge as a fair value

hedge. The gain or loss on the hedging instrument is directly offset by the gain or loss on the

hedged item. The exposure will have the same effect on ABC’s net income whether it is recorded

as a cash flow hedge or a fair value hedge, although treating it as a fair value hedge will require

documentation for only the net hedge and not each individual exposure. See Figure 4 for a

diagram for how ABC should capture all exposures in its hedge.

In order to receive hedge accounting treatment, ABC must document, and test for effectiveness,

every hedge. For cash flow hedges, it must document a hedge for each exposure, whereas a fair

value hedge ABC may document the net exposure. Additionally, ABC may enter into one hedge

to offset the entire exposure of all of its subsidiaries, but must subsequently issue internal hedge

contracts where appropriate. ABC should trade all exposures together, cash flow or fair value,

but should issue internal hedge contracts via its central treasury for each entity and for each

relevant exposure.

Documentation must occur at

the inception of the hedge,

and ABC should state which

type of hedge it will

categorized it as, methods for

testing effectiveness, the

credit worthiness of its trading

counterparties, and general

rationale for hedging. For

purposes of testing, a hedge

must meet the 80%-125%

rule, or must offset 80% to

125% of the hedged item. At

the onset of the hedge, the

issuance of financials and at

the conclusion of a hedge

ABC is required to test

effectiveness both

retrospectively and

prospectively. Additionally,

ABC may test either

quantitatively and

qualitatively depending on a

few criteria. ABC will use

qualitative methods to test

prospectively and quantitative

methods to test

retrospectively. Qualitative

15

test will require ensuring the hedge meets all requirements set forth during the initial

documentation. Quantitative test will require ensuring the actual gain or loss on the hedged item

is offset by the hedge using the 80%-125% rule.

For cash flow hedges, ABC needs to document each exposure separately. Because this adds

additional work to ABC’s treasury function, ABC should enforce the threshold amount of 2

million USD. Additionally, cash flow hedges require an estimate that is accurate within thirty

days of when the transaction will happen, and when it the transaction will settle. ABC should

record these estimates on the initial documentation. The failure to create documentation and

perform effectiveness tests will result in the reissuance of financial statements. However, if a

specific hedge does not meet effectiveness tests, then ABC will need to reclassify the hedge and

will lose the benefits ASC 815 and ASC 830 provides.

Execution

To make ABC’s hedging program successful, ABC will require additional resources to initiate

and maintain its hedges. ABC should accomplish this through its treasury and accounting teams

and can reasonably take up to a year to establish a successful program. This program will run

indefinitely.

ABC’s central treasury will download its FX exposure report daily and each subsidiary must

report any firm unrecognized commitment or highly probable forecasted transaction over 2

million USD. The corporate treasury will need to verify each submitted firm unrecognized

commitment or forecasted transaction so that items are not hedged which are not supposed to be.

ABC will need to include in its report, if possible, data about firm commitments entered into and

forecasted transactions that are highly probable to happen. For firm commitments and forecasted

transactions, ABC might need to pull this data from the company’s Customer Relationship

Management (CRM) system. If this is not possible, it will need its subsidiaries to report these

numbers to the central treasury. Periodically ABC will also need to validate the data it is using to

hedge its exposures through the methods mentioned earlier in this section.

Every day ABC’s treasury will check for updates in its FX exposures. It will continue to bid out

its exposure amongst its counterparties so that it may obtain optimal pricing. Wherever possible,

it will urge its counterparties to take its spread in the spot rate, which will allow for minimal

gains and losses in net income. Additionally, ABC will hedge its positions out towards month

end. Two business days before the value date of all existing hedges, it will swap out of its

positions for the end of the next month. Here it will strive for optimal pricing as was described in

the “Cost” section of this recommendation.

When each item is added to the overall hedge, ABC’s corporate treasury will issue an internal

forward contract to offset the underlying exposure. Even though ABC is swapping its exposures

each month, the internal forward contracts are for the duration of when the forecast or

commitment was estimated to the settlement of the transaction. ABC should use its Bloomberg

service and best judgment to price the forward points for its subsidiaries, and should use the

same spot rate it received from its counterparties.

The treasury team will document each internal hedge, and perform subsequent testing. This

might require additional staff to manage all the documentation and testing, and should be

considered when setting its trading thresholds. The treasury team will work closely with the

16

accounting function to ensure proper treatment of each underlying exposure; ABC should

designate forecasted transactions and firm commitments over 2 million USD as cash flow hedges

and recognized exposures accounts with changes over 250,000 USD as fair value hedges. This is

vital because improper treatment can result in restatements or wasted resources in producing the

hedges in a manner that is compliance with ASC 815 and ASC 830.

On the onset of each hedge, each time ABC issues financial statements and at the settlement of

each transaction, ABC will issue accounting entries to properly reflect the transactions’ values.

As each entry is diverse because of a number of factors, it is encouraged that ABC references

PricewaterhouseCoopers’ (PwC) “Guide to Accounting for Derivative Instruments and Hedging

Activities (2013)” and “Foreign Currency (2014)” manuals that are downloadable from PwC’s

webpage.31,32

Additionally, the more counterparties ABC transacts with in a hedging period the more diligence

accounts payable and receivable needs to take to ensure settlements are happening correctly.

Accounts payable and receivable will need to verify hedge amounts with the bank after each

transaction. Additionally, accounts payable and receivable will need to need to meticulously

verify settlement amounts with each provider each month end. Failure to verify amounts can

result in settlement errors, and incorrect hedges being transacted.

Opportunities and Threats

The threats pertaining to this new hedging program lie almost exclusively with ABC’s foreign

exchange providers. Its providers can take an additional spread in the rates issued, but this is

negated by spreading the volume out to multiple providers. Additionally, its counterparties will

have credit risk. A foreign currency provider with sub-par credit usually is more inclined to

default on its hedge which puts ABC at risk. ABC should take into consideration the credit rating

of its trading counterparties.

Additional threats may come from incorrect data, user error and future changes to hedge

accounting requirements. ABC can do little to mitigate the risk of future changes to hedge

accounting codification, but ABC can mitigate the risk of these other items by following the

procedures specified in this recommendation section.

Future opportunities for improvements may come when ABC has a successful and established

hedging program. These may include hedging with option contracts, trading the triangulated

exposure based off of the total debit and credit amounts and expanding what exposures it

includes in its forecasted transactions. Hedging with option contracts will have capital

requirements at the onset of the hedge, but will allow ABC to offset all the risks that it might

have losses on the derivative but still allow for gains in its exposure amounts. Trading the

triangulated exposure will require additional comfort from ABC’s executives and investors as it

is still a new practice. Additionally, it will require additional sophistication when issuing internal

hedge contracts as amounts, exposures and rates will not directly match. However, this method

31 PricewaterhouseCoopers’, “Guide to Accounting for Derivative Instruments and Hedging Activities”, August 23rd, 2013, PwC Guide Library, <http://www.pwc.com/us/en/cfodirect/publications/accounting-guides/guide-to-accounting-for-derivative-instruments-and-hedging-activities-2013-edition.jhtml>, accessed on July 12, 2015 32 PricewaterhouseCoopers’, “Foreign Currency”, December 8th, 2014, PwC Guide Library, <http://www.pwc.com/us/en/cfodirect/publications/accounting-guides/foreign-currency-reporting.jhtml?display=/us/en/cfodirect/publications/accounting-guides>, accessed on July 12, 2015

17

does tend to allow for greater gains and mitigated losses and always mitigates volumes traded,

which is favorable for debt covenants and credit agreements.

Another opportunity for improvements is to allow highly correlated exposures to hedge each

other, but that requires an increase in ABC’s risk appetite, and it may not want to pursue that

option. This practice would drastically reduce the amount of volume being traded, although ABC

would need to give strict attention so that it still meets hedge accounting criteria.

Increasing the criteria of what constitutes a forecasted transaction will allow for more stable cash

flows, but it runs the risk of being ineffective when during hedge testing. This could include

forecasting quarterly and yearly revenues and expenses. Typically to maintain an effective

forecast, firms will spend great resources into managing its forecasted numbers and updating its

hedges when new information becomes available.

When the initial hedging program is efficient, ABC should reduce all thresholds so that its

hedges are more effective. With these thresholds ABC will not have the ability to capture every

exposure, but it will capture most exposures. Generally, capturing large exposures will help a

hedging program become effective but capture all small exposures will help a hedging program

become most effective.

CONCLUSION

ABC is a dynamic company with an impressive treasury function. As it continues to make the

changes and improvements it needs, it should to focus its efforts on creating a hedging program.

Great care should go into making sure its exposures and rates are accurate, the timing of its

hedges are frequent to capture all exposures, and that its pricing is competitive. Additionally, it

should strive to utilize hedge accounting so that any unrecognized gains and losses are reported

in Other Comprehensive Income, thereby smoothing out period over period earnings. By

establishing a successful hedging program, ABC can expect to increase firm value by

minimizing FX risk, stabilizing profits and securing cash flows.

18

BIBLIOGRAPHY

Allayannis, George, Ugur Lel, Darius Miller, “The use of foreign currency derivatives, corporate

governance, and firm value around the world”, Journal of International Economics, Vol.

87 Issue 1, May2012, p65-79. 15p., Business Source Premier, EBSCOhost, accessed on

July 13, 2015

Chang, Feng-Yi, Chin-Wen Hsin, Shin-Rong Shiah-Hou, “A re-examination of exposure to

exchange rate risk: The impact of earnings management and currency derivative usage”,

Journal of International Economics, Vol. 87 Issue 1, May 2012, p65-79. 15p., Business

Source Premier, EBSCOhost, accessed on July 13, 2015

Davis, Bob, “Undervalue/Overvalue: The Great Yuan Debate Continues,” The Wall Street

Journal, May 13th, 2014,

<http://blogs.wsj.com/chinarealtime/2014/05/13/undervalueovervalue-the-great-yuan-

debate-continues/>, accessed on July 31st, 2015

Financial Accounting Standard Board, “ASC 815”, Generally Accepted Accounting Principles,

<https://asc.fasb.org/subtopic&trid=2175825>, accessed on July 12, 2015

Financial Accounting Standard Board, “ASC 830”, Generally Accepted Accounting Principles,

<https://asc.fasb.org/subtopic&trid=2175826>, accessed on July 12, 2015

ABC Medical Company 2006 10-K,

<http://investors.ABCMedical.com/index.php?s=127&year=2015&cat=2>, Page 46,

accessed on August 5, 2015.

ABC Medical Company 2014 10-K,

<http://investors.ABCMedical.com/index.php?s=127&year=2015&cat=2>, accessed on

July 12, 2015

ABC Medical Company “ABC Medical 1QFY15 Financial Results Conference Call Prepared

Remarks”, January 28th, 2015, accessed on July 30, 2015

Jankensgård, Håkan, “Does Centralisation of FX Derivative Usage Impact Firm Value?”,

European Financial Management, Vol. 21 Issue 2, March 2015, p309-332. 24p., Business

Source Premier, EBSCOhost, accessed on July 13, 2015

Jordan, Kerrie, “ABC Speeds Launch of Innovative, Life-Saving Technology”, Oracle Webpage,

<https://blogs.oracle.com/PLM/entry/ABC_speeds_launch_of_innovative>, October 9th,

2015, accessed on August 5, 2015

M., Silvia, “Difference Between Fair Value Hedge and Cash Flow Hedge”, IFRS Box, May 29th,

2014, <http://www.ifrsbox.com/difference-fair-value-hedge-cash-flow-hedge/>, accessed

on July 30th, 5015

MarketLine, “ABC Medical Company MarketLine Company Profile”, February 2015, Business

Source Premier, EBSCOhost, accessed on July 12, 2015

19

MarketLine, “ABC Medical Company SWOT Analysis”, February 2015, Business Source

Premier, EBSCOhost, accessed on July 12, 2015

Oksanen, Heikki, “Re-pegging the renminbi to a basket: issues and implications”, Asian-Pacific

Economic Literature, Vol. 26 Issue 1, May 2012, p18-33, Business Source Premier,

EBSCOhost, accessed on July 13, 2015

Pérez-González, Francisco, Hayong Yun, “Risk Management and Firm Value: Evidence from

Weather Derivatives”, Journal of Finance, Vol. 68 Issue 5, October 2013, p2143-2176,

Business Source Premier, EBSCOhost, accessed on July 13, 2015

Phillips Heathcare. 2014 20-F,

<http://www.philips.com/about/investor/financialresults/annualreports/index.page>,

accessed on July 14, 2015

PricewaterhouseCoopers’, “Guide to Accounting for Derivative Instruments and Hedging

Activities”, August 23rd, 2013, PwC Guide Library,

<http://www.pwc.com/us/en/cfodirect/publications/accounting-guides/guide-to-

accounting-for-derivative-instruments-and-hedging-activities-2013-edition.jhtml>,

accessed on July 12, 2015

PricewaterhouseCoopers’, “Foreign Currency”, December 8th, 2014, PwC Guide Library,

<http://www.pwc.com/us/en/cfodirect/publications/accounting-guides/foreign-currency-

reporting.jhtml?display=/us/en/cfodirect/publications/accounting-guides>, accessed on

July 12, 2015

Rambo, Robert G., Daphne Main, Louis Beaubien, “Reducing reporting risk Designating foreign

currency forward contracts as cash flow hedges”, Journal of Accounting Education, Vol.

29 Issue 4, December 2011, p284-294. 11p., Business Source Premier, EBSCOhost,

accessed on July 13, 2015

Treasury and Risk Management, “GE’s Treasury Strategy”, April 2001, Business Source

Premier, EBSCOhost, accessed on July 12, 2015

Treasury and Risk Management, “FX Power: General Electric Co.”, November 2008, Business

Source Premier, EBSCOhost, accessed on July 12, 2015

“USDCHF Spot Exchange Rate,” Bloomberg Business, January 15th, 2015,

<http://www.bloomberg.com/quote/USDCHF:CUR>, accessed on July 29, 2015

“USDCNY Spot Exchange Rate,” Bloomberg Business, Five Year Graph,

<http://www.bloomberg.com/quote/USDCNY:CUR>, accessed on July 29, 2015