Managing FX Risk Through Various Company Lifecycles

Transcription

1 Managing FX Risk Through Various Company Lifecycles Scott Bilter, CFA CFO Atlas Risk Advisory Scott Bilter has over 20 years of expertise in the capital markets sector. At Hewlett Packard, Scott held a number of executive positions including VP of Corporate Finance and Foreign Exchange, and VP of Worldwide FP&A, overseeing a staff of 300. From , he was Vice President of FX Sales at Merrill Lynch. Scott s experience includes: foreign exchange, commodity, and interest rate hedging; debt issuance; stock buy backs, capital strategy, cash flow forecasting and financial planning. Scott received his Bachelor of Arts in Quantitative Economics from Stanford University in 1990 and an MBA in Finance from UCLA s Anderson School in Scott is also a registered Chartered Financial Analyst FXATLAS Greg Murphy Sr. Treasury Manager Keysight Technologies Greg has held a variety of finance roles with Agilent/Keysight Technologies. He is currently responsible for FX risk management as well as supporting corporate finance activities. Prior to joining treasury, Greg was Controller for the Remarketing Solutions Division. Greg holds a BA in International Development Studies from UCLA and an MBA in Finance from the UC Davis Graduate School of Management. greg.t.murphy@keysight.com

2 Session discussion points Small companies: Set yourself up for future success Ideal Policies Ideal Strategies Medium/large companies: How to evolve with added complexity Keysight overview and best practices Technology requirements beyond the spreadsheet Ideal Forecasting methodologies Complex hedging techniques

3 Ideal Policies: Accounting Rate Daily or average rate methodology Ok for early stages before a company hedges, but not ideal once hedging program is put in place FX volatility intramonth affects revenues and expenses, high visibility items Previous month end rate methodology Less friction when hedging (no slippage between hedges and AR, no need for high frequency hedging of the balance sheet) FX volatility intramonth affects OI&E Month end close process less complicated

4 Ideal Policies Continued Establish Netting Day for centralized cash conversions Minimize/eliminate unnecessary spot trading Supports better forecasting methodology exposures Company wide ERP/accounting consistency Advocate for quick ERP migration for any acquisitions Advocate for centralized chart of accounts Advocate for any internal data warehouses to include transactional currency detail Functional currency decision for international entities USD functional easier to get hedge accounting for LC exposures LC functional tend to have smaller balance sheet exposures

5 Ideal CF Hedging Strategy Once a year set it and forget it approach may minimize administrative burden, but causes other potential problems Huge staircase effect causes distortions for your business Victim of your own success even if you catch a favorable rate spike Layered approach allows for smoother transition during rate shocks Need to buy enough time to adapt to new environment Keeps internal plans from either becoming unachievable or too easy Avoiding significant downside should be the goal of hedging, as opposed to trying to maximize upside Resist the temptation to time the markets Providing constant currency guidance without hedging is insufficient

6 Danger of hedging once per year March EUR = 1.39 USD March EUR = 1.05 USD 25% drop in 1 year!

7 Rolling vs Annual Hedging Program Annual hedged rate changes from 1.38 to 1.21 (12%) Quarterly layered hedges change on average 3%, maximum change is 5.6%

8 Keysight Technologies Worldwide leader in high value, mission critical electronic design and test solutions. End markets include: Commercial communications Aerospace, defense & government, Electronic industrial Network test and visibility FY16 revenue: $2.9B Company History : The Hewlett-Packard years A company founded on electronic measurement innovation : The Agilent Technologies years Spun off from HP, Agilent became the World s Premier Measurement Company 2014: Keysight is launched Focused singularly on electronic design and test solutions

9 FX Risk Management Overview Primary Exposures Hedging Thresholds Forecasts Other Policies Balance sheet EUR JPY CHF MXN Notional threshold - $5M net exposure per month Forecasts submitted by local finance teams, hedges executed centrally Hedging objective is to reduce impact of FX volatility Cash flow JPY MYR SGD KRW Notional threshold - $5M net exposure per quarter Forecasts provided by FP&A Options are allowed but seldom used

10 FX Risk Management Best Practices Accounting rates Netting Natural hedges Acquisitions Technology The accounting rate for traded currencies is the spot rate from executed contracts Worldwide cash is managed by a central team Cash requirements for trade and IC transactions are consolidated monthly FX hedges and conversions mature on the same day, minimizing need for mid-month spot trades Identified areas to reduce exposure by converting cash and coordinating timing of IC dividends Keysight uses 1 ERP and acquisitions are ultimately migrated to existing ERP During integration, initial focus is on data visibility to quickly understand combined exposures FX risk management software supports the entire process: Provide visibility into historical exposures Consolidate forecasts from multiple sources Identify trends and significant changes Generate trade tickets Perform ad hoc analysis Report results

11 FX Risk Management Forecast Accuracy Review Entity Forecast Actuals Aug 2017 Results Forecast - Actual Forecast Deviation USD vs. Local Ccy Apr/(Depr) Canada (1,803) (2,288) % 0.1% Finland 1,568 3,452 (1,884) -55% -0.7% France (6,200) (6,971) % -0.7% Germany 3,452 2,627 2,207 31% -0.7% India 110 (470) % -0.4% Italy (2,190) (2,945) % -0.7% Japan (38,878) (37,911) (968) 3% -0.2% Korea (3,907) (4,781) % 0.6% Singapore (8,090) (8,630) 4,551-6% 0.1% Switzerland 1,326 1,396 (70) -5% -0.1% United Kingdom (3,855) (3,204) (651) 20% 2.0% Monthly report highlights areas requiring further analysis. Hedge calls with the full forecasting team were held during the separation to review unusual transactions and exposures.

12 Non- Controllables Controllables FX Risk Management Reporting Balance Sheet Monthly hedge report highlights main contributors to FX impact in Other Income & Expense: Breakdown net gain/loss into main components: forecast deviation, rate variance, forward points, accounting adjustments Q2'17 Forecast Deviation ($23) Accounting Adjustments ($4) FX Execution (Deal Rate vs. AR) $8 Cost of Hedging ($27) Unhedged Exposure $44 Others ($14) Subtotal - BS Hedging G/(L) ($16) Cash flow forward points $38 Subtotal - CF Hedging G/(L) $38 TOTAL $22 Notes Gain of $60 in EUR offset by losses of ($30) for KRW and ($7) for MYR Primarily driven by delta in corporate vs. government Due to mid-month GBP and EUR adjustment trades. Unfavorable EUR, MXN, CHF offset by favorable JPY forward points. Feb - Gains of $20 from MXN, $14 from INR, $10 from SEK Includes consol loss of $10 Forward points on MYR and JPY cash flow contracts. Explanations for large or unusual impacts Comparison of hedge notional vs actual exposure by currency

13 FX Risk Management Reporting Cash Flow Currency Multiple comparisons illustrate the impact of a layered hedge program: Net impact of YoY currency movements on revenue and expenses Detail by currency including volume, underlying gain/loss, and hedging gain/loss Trend of accounting rates, hedge rates, and YoY rates for primary currencies Exposure Exposure G/(L) Hedge Hedging G/(L) Net Exposure Net G/L = USD equivalent of LC Revenue - LC Expenses Q1'17 Embedded in Revenue/COS/Opex YoY Q1'17/Q1'16 Buy/(Sell) LC Booked to COS = Exposure + Hedge = Exposure G/(L) + Hedging G/(L) vs. Plan Q1'17 Q1'17 Q1'17 YoY vs. Plan JPY (46) (122) 23 (7) 32 (23) MYR (106) (27) (8) 1 (2) KRW 88 4 (3) (85) (1) 3 3 (3) SGD (92) (1) (33) (1) 1 Hedged - 41 (21) - (6) - 36 (27) Unhedged - (16) (2) (16) (2) Total G/(L) - 25 (23) - (6) - 20 (28)

14 FX Risk Management Considerations Options Current state Using exclusively forwards for both balance sheet and cash flow hedges Potential improvement Integrate options into hedging program? Status Analysis of exposures and back testing hasn t proven clear benefit to warrant extra complexity and upfront cost VaR Current state Notional thresholds used to determine which currencies to hedge Potential improvement Review portfolio of exposures from a VaR perspective which may lead to different hedging decisions Status Previous analyses have confirmed that existing approach is reasonable, will continue to monitor

15 Technology requirements to match complexity Large companies will eventually outgrow a spreadsheet only solution Need to get transactional currency details from ERP system(s) Need to be able to process and organize this multidimensional data Need dashboards and quickly accessible month-end analytics to identify sources of variance

16 Balance sheet forecasting in complex environment Accountability and ownership of balance sheet actuals is often a problem Incorporate more accountable revenue and expense forecasts wherever possible Provide green yellow red forecast accuracy feedback Don t ignore seasonality Don t make it more complex than necessary: forecasting timing of collections/disbursements is not necessary (can be handled with swaps)

17 Balance Sheet Hedging Analytics Monthly scorecard for balance sheet hedge effectiveness FX risk manager needs to quickly reconcile deltas between remeasurement gains/losses and the offsetting hedges

18 Cash Flow Hedging Analytics Bridge allocated FX gains/losses back to known plans and metrics Can t just provide gains/losses in isolation (business partners have 20/20 hindsight) Work with FP&A to update and communicate a rolling plan that incorporates hedging Explain the inevitable deltas between the plan and the actual results, which will be both volume driven and rate driven

19 Hedging complex exposures Assymetrical pricing for different currency rate environments Plain vanilla options, passing on premium cost in internal pricing rate Currency sharing clauses or other embedded derivatives Exotic knock-in or knock-out option structures Unambiguous details in contracts are key (rate references, rounding approach), in order to match hedging outcomes Don t add complexity unless necessary Avoid range forwards or average rate options if possible Large number of currencies pairs and/or cross currency exposures Triangulate to USD trades externally, allocate crosses internally VaR approach, hedge portfolio along the efficient frontier, trading off expense (forward points) for risk reduction

20 Hedging complex exposures (VaR) Formalize a risk budget based on current exposures and current hedging activity Mean variance optimization based on interest rates differentials and VaR

21 Contacts Scott Bilter, CFA CFO Atlas Risk Advisory Scott Bilter has over 20 years of expertise in the capital markets sector. At Hewlett Packard, Scott held a number of executive positions including VP of Corporate Finance and Foreign Exchange, and VP of Worldwide FP&A, overseeing a staff of 300. From , he was Vice President of FX Sales at Merrill Lynch. Scott s experience includes: foreign exchange, commodity, and interest rate hedging; debt issuance; stock buy backs, capital strategy, cash flow forecasting and financial planning. Scott received his Bachelor of Arts in Quantitative Economics from Stanford University in 1990 and an MBA in Finance from UCLA s Anderson School in Scott is also a registered Chartered Financial Analyst FXATLAS Greg Murphy Sr. Treasury Manager Keysight Technologies Greg has held a variety of finance roles with Agilent/Keysight Technologies. He is currently responsible for FX risk management as well as supporting corporate finance activities. Prior to joining treasury, Greg was Controller for the Remarketing Solutions Division. Greg holds a BA in International Development Studies from UCLA and an MBA in Finance from the UC Davis Graduate School of Management. greg.t.murphy@keysight.com