forex for importers and exporters - south african …...understand hedging instruments, the merits...

Forex

for Importers

and Exporters

SACC Finance CPD

Workshop

12 October 2017

© Copyright Valufin Ltd 2017

What all SME’s should know about Forex

2© Copyright Valufin Ltd 2017

1. Common mistakes

2. Lack of transparency in FX P & L

3. Integrate forex effectively

4. Align the forex strategy to the business strategy

5. Understand hedging instruments

6. The behaviour of instruments

7. Choices for usage of instruments

8. Creation of strategies that provide foundation & flexibility

9. Costing policy aligned to strategy

10. Determine management information

11. Anomalies of forex accounting influences

12. What help can you get on Forex

Common mistakes in recognising risk


Placement of Order

Inception

Manufacture & Shipping

In Progress

Typically before docking

Payment

In store & Manufacture

In stock

Receipt of Order

Sale

Manufacture & Shipping

In Progress

Typically before docking

Receipt £

Accounting Treatment

Year end

Typical Point of

Recognition of

Currency Risk

3 to 6 months 1 to 2 + months

1 to 6 months

Typical Point of

Recognition of

Currency Risk

Lack of transparency in what causes Forex P & L


Imports

£ Value of

Imports

Revaluations

Currency

Accounts

Accounting

Recognition

Product

Costing

£ Paid for FX

£ Received

for Sales

Year end

Rates

Forex

hedging

rates

Spot Rate

Exports

Time

Accountants

£

Integrate forex effectively into the business


Forex

Finance

Product

Sales

Incentives

Gross Profit

MI

Align the forex strategy to the business strategy


• Instruments

• Duration

• Degree of hedge

Hedging Strategy

• Fixed costing

• Flexible costing

• Price sensitivity

Costing Strategy

• Market leader

• Market share

• Price strategy

Business Strategy

Understand hedging instruments, the merits and risks


Spot

No hedge

No credit

Market Rate on the day

Full Risk

Forward

Fixed

Full hedge

% margin or M2M

Rate Known, sliding scale

Opportunity Risk

Forward Optional

Full hedge at higher cost

% mqrgin or M2M

Rate same every day

Opportunity Risk

Forward Participating

Full hedge at higher cost

% margin or

M2M

Range of rates known

Worst case expensive, gain

some opportunity

Option

Full hedge

Cash upfront

Cost known

Worst case expensive, gain

some opportunity

Forward Non Deliverable

Full hedge combined

% margin or M2M

Cost unknown

Risk of component parts

The behaviour of instruments during their life


Ability to use before

term

Credit Impact

during term

Rate on maturity

Impact on accounting during term

Cash flows on

“utlisation”

Usage of instruments when making payments or receipts


• True Rate

• At what Date

• Amount(s)

• Relative to others

Effective Rate

• Cash flows

• True Rate

• Timing Differences

• Amount(s)

UtilisationRate

• T + 2

• Daily fluctuations

Spot rate

Creation of strategies that provide foundation protection

and upside flexibility


Foundation of Fixed Forward Cover, 50% of annual requirement

Swap cover

timing as

needed

Average Cover Rate

Spot Rate

Use spot when better

than any Cover

Determining a costing policy, aligned to strategy


Strategy

•Market Growth

•Market Factors

•Price Sensitive

•Competitors

Hedging Strategy

•Seasonal Flows

•High Volatility

•Hedging

•50% cover

•Long dated

•Small tranches

Costing Policy

•Stable prices

•Price to hold for a season

•Use cover to create a weighted average cost rate for 6 months

Determine management information needs


Forward cover Ratios

Range of Effective rates

Pattern of values per period

Cash flows

Interest rate curve

Daily statements

Activities Report

Revaluations

Variation Margin

Profit and Loss

Market rates

Exposure Detail

Costing Rates

Accounting Rates

Sales Rates

Bills / Shipping / Interest

Calculated Forward rate

Adjusted Forward Rate

Effective Payment Rate

Expected v Actual Pay Dates

Cover v Exposure Gaps

Premiums & Discounts

Anomalies of forex accounting influences over hedging strategies


Accounting Policy

1. Monthly Revaluations

2. Annual Revaluation

Strategy

• Market Growth

• Market Factors

• Price Sensitive

• Competitors

Hedging Strategy

• Seasonal Flows

• High Volatility

• Hedging

• 50% cover

• Long dated

• Small tranches

Costing Policy

• Stable prices

• Price to hold for a season

• Use cover to create a weighted average cost rate for 6 months

Profit and Loss Impact

1. Noise

2. Not correlating hedging

use to goods payments

What help can you get on Forex


Banks Brokers Advisors

Risks

Only reference is the market

Focus more on process

No ability to correlate to the business

Most never been in business

Do not understand the accounting

Management Information is not understood

Limited ability to give advice

Client feeds incorrect business information

Valufin Solution


Outsourced Treasury Forex Management

Expertise, systems, decision making at

the cost of an administrator

✓ Market

✓ Business

✓ Future business strategy

✓ Historic knowledge

✓ Systems

✓ Management Information

✓ Use of hedging strategy

✓ Proactive

✓ Paid a retainer fee

Thank You


Sharon Constançon

[email protected]

Tel: 083 463 7215 / +44 7773 777 495

www..valufin.com

Currency Treasury

Management

Solutions

from the real beginning

to

the very end

mailto:[email protected]

http://www.geniusmethods.com/

forex for importers and exporters - south african …...understand hedging instruments, the merits...

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