From Data to Decision:Effective Strategies for Managing FX

Exposure as an Enterprise RiskWolfgang Koester

CEOFiREapps

Cynthia TorsneyForeign Exchange Manager

Google

Agenda

• Introductions & Overview• Foreign Exchange Exposure Management Overview

– FX G/L Drivers– Accounting Challenges– Treasury Challenges

• Real World Opportunities– Identifying and overcoming Gaps in existing processes– FX Issues Impact Treasury Today– Impact of Manual Processes

• Automating FX Exposure Management– Automated FX Data Management– FX Exposure Management for the Balance Sheet

– FX Exposure Management for Forecasted Cash Flows– Benefits

A Perfect Storm

A Perfect Storm

A Perfect Storm

A Perfect Storm

A Perfect Storm

Increasing CurrencyRisk for

Corporations

Currency Currency Volatility %USD JPY 22.84%

USD SEK 22.25%EUR USD 21.50%USD CAD 21.46%GBP USD 20.95%USD CHF 20.48%EUR GBP 13.97%EUR CHF 12.55%

Avg. 19.50%

Currency Currency Volatility %AUD JPY 59.10%USD KRW 56.00%USD MXN 52.10%USD BRL 49.25%USD AUD 47.06%USD NZD 41.88%USD CZK 26.75%USD NOK 21.50%USD DKK. 21.25%

Avg. 41.65%

One Week Volatility

Risk in Volatility and Time

Exposure One Week Risk (Volatility)January 2008

G10 Currencies $70MM 10% = $7MM

Non-G10 Currencies $30MM 18% = $5.4MM

Total $12.4MM

Exposure One Day Risk (Volatility)September 2008

G10 Currencies $70MM .6% = $.42MM

Non-G10 Currencies $30MM 3.2% = $.96MM

Total $1.4MM

Reduce Probability of Risk by Reducing Time

$21.0MMTotal

35% = 10.5MM$30MMNon-G10 Currencies

15% = $10.5MM$70MMG10 Currencies

September 2008

The New Imperative for Enterprise Currency Risk Man agement

Foreign Exchange Exposure Management Value Chain

Controller Treasurer

Banks / Inv. BanksExposure ManagementCorporate Transaction Data

Copyright 2007 Rim Tec Inc. Slide 12

Trade Post-TradePre -Trade

Select Price Execute Confirm Settle AccountAggregate Analyze Decide

Business Systems

Account ReportTransact

Compliance

Foreign Currency Exposure Lifecycle TM

Forecasted Exposure Transaction Exposure

Forecasting / Budgeting

Sale anticipated, forecasted, budgeted or planned

Purchase/Expense anticipated, forecasted, budgeted or planned

Transaction

Sale occurs in foreign currency

Collection

Cash received

Conversion

Sell foreign currency and buy USD

Purchase occurs in foreign currency

Foreign Currency Activity

Nature of Exposure

Systems

Objectives

Long Term Exposure > 3 Months Balance Sheet / Transaction Exposure

ERP / Accounting Systems / Spreadsheets

Managing FX Gain / Loss on Income StatementGross Margin / Net Operating Income

Protection

Planning / Budgeting / Procurement / Order Mgmt. / Spreadsheets

Buy foreign currency to make payment

Controller Treasurer

Business Units

Corporate Controllers

FX Management Process: State of the Art?

Complex Exposure Reporting Spreadsheets

Banks and Trading Platforms

Enterprise Cash Flow Exposures

Sell and buy side balance / coordination

OutboundLogistics

Supply ChainMgmt

Invest-ments

InvestReturns

R/M &Lower-tierSuppliers

ShipShip

Ship

Ship

Ship

Top-tierSuppliers

PP&E

FinancialAssets

A/PWIP

A/RInv

CompanyOr Product

Division

Taxes DebtCompetitor Vulnerability /Advantage Assessment

Customers

Distribution Channel

Returns

Repair & Service

Company Outsourced Activity Demand / Info

Foreign Service Center Providers

Potential Non-Dollar Exposure

PrimaryValueChain

SupportServiceValue Chain

Currency Flow & ExposureAssessment Model

Customer Vulnerability or

Opportunity

1

5

3

24

4

8 7 6

18

19

9 10

22

11

1312

14 15

23

2120

2

16

17

FX G/L on Exposure Data (Accounting Systems) (Controller)

FX G/L on Derivatives (spot) (Treasurer)

Exposure Management Efficiency (Should net to Zero)

Derivative Cost/Benefits (Fwd Points)

FX Gain / Loss on P/L (CFO Focus)

Identifying Balance Sheet Exposures

FX Gain / Loss on the Income Statement is the result of netting the gain/loss on accounting exposures and the gain/loss on hedges that the Treasurer executes. In theory, the gain/loss on exposures and the gain/loss on derivatives should net to zero. In reality, this is rarely the case, and the Treasurer has very little control over the corporate FX Gain/Loss that he/she is responsible for reporting to the CFO

FX G/L on Exposure Data (1) (Controller)

FX G/L on Derivatives (spot) (Treasurer)

Exposure Management Efficiency

Derivative Cost/Benefits (Fwd Points)

FX Gain / Loss on P/L (CFO)

(1)Includes accounting volatility

Bad Data: The beginning of a hard problem

Common data issues that result in in accurate exposure data

-Incorrect Account Setup in G/L systems

-Improper Systematic Revaluation Processes

-Incorrect Transaction Postings- Intercompany Transactions- Improper MC Transaction Posting - Lack of proper accounting controls and

monitoring processes

When data delivered by accounting is inaccurate or incomplete, the company will experience unpredictable results.

FX G/L on Exposure Data (1) (Controller)

FX G/L on Derivatives (spot) (Treasurer)

Exposure Management Efficiency

Derivative Cost/Benefits (Fwd Points)

FX Gain / Loss on P/L (CFO)

(1)Includes accounting volatility

Inaccurate Definitions and inefficient Decisions

Common Treasury Operations issues and challenges

-Lack of data, access, visibility & transparency

-Manual exposure definition process- Manual, decentralized- Spreadsheet intensive- 80% focus on data aggregation

-Inefficient decision making process- Time latency, creates market risk- Poor collaboration with stakeholders

( tax, controller and local treasurers )

When Treasury relies on manual processes, complex spreadsheets and timing delays, companies are at increased risk of inaccurate exposure definitions and currency volatility

19

Multicurrency Transaction Accounting

Multicurrency Transaction Accounting

• Identify FX exposures

• Analyze exposure data for accuracy and completeness

• Expedites resolution of discrepancies

• Provide recommendations for reducing and managing exposures

• Export currency actions

• Reporting

• Import Trade Instructions

• Select and Price Derivative Products

• Execute Trade

• Import Exposure and Hedges

• Track & Account for Trades

• Hedge Accounting and Effectiveness Testing

• Capture transaction exposures within General Ledger Accounts

• Apply FX re-measurement and revaluation rules

• Provide source data input for FX exposure management

Exposure Analysis & Decision Making

Exposure Analysis & Decision Making Trade ExecutionTrade Execution Hedge AccountingHedge Accounting

FX Automation: Toward a Straight Through Process

• In the past, Google had multiple sets of books & limited visibility into its FX exposures

• FX Team relied on manual processes and incomplete data for defining, analyzing and managing foreign currency exposures:

– No single source of complete exposure “truth”

• Input from many teams required to determine a single exposure

• Direct Oracle queries were inconsistent, dependant on individual querying

– Spreadsheet-based definition and analysis

• Manual data entry: Error prone & time consuming

• Process latency introduced market risk

– Lack of exposure reporting and transparency

• Difficult to understand root causes of exposures

• No basis for cross-functional problem solving and process improvement

• Unable to take full advantage of existing natural hedges in the business as a means of reducing exposures and lowering hedge transactions costs

• Focus of hedging was limited to large, easily visible exposures

20

In the Trenches: Balance Sheet/Transaction Exposure Issues

Pain Points: Impact of Manual Processes

FX ExposureReport Delays Close Process

Fixed Assets Impacton FX Hedges

• We required instant access to expense data by currency by set of books• A report was run by business systems analyst• Report was key component in determining FX exposures

• Auditing for accounting errors that affect exposures was a time consuming process•Errors could reduce hedge effectiveness• Strong focus on account reconciliations

•IT equipment being shipped among many different entities•Intercompany receivable and payables affected by asset movements•Difficult for Treasury to quickly adapt hedges to exposure changes

• Consequence: It took 1-5 days for report to be run. We needed data to be easily accessible without time delays

• Reporting time delays prohibited FX team from taking timely actions to hedge our risks

• Consequence: resources targeted at auditing rather than analysis

• Without tools to easily aggregate data and identify exposure, audit activities by finance team were inefficient

• Consequence: Risk of lower hedge effectiveness

• No existing internal system could inform you that an exposure had changed

Solution Footprint

Banks

&

Trading

Platforms

Treasury

Workstations

Better Data Better Decisions

Q&A