FX risk management: bring on the robots

Cash management

FX risk management: bring on the robots

October 2019

Automation now enables corporate clients to reduce their FX risk and enhance liquidity management. Ahead of EuroFinance Copenhagen, Graham Buck talks to Deutsche Bank’s VP risk management solutions, Xavier Szebrat on how RPA has transformed one company’s FX hedging

Even the most stable currency can experience bouts of volatility, which don’t necessarily involve depreciation. Take the example of the Swiss franc, which for years had a ‘ceiling’ applied to prevent it over-appreciating against the single currency. When the peg was suddenly removed in January 2015, the franc jumped more than 30% in one morning to the consternation of Switzerland’s exporters.

But many other currencies have experienced sharp downward pressure. Sterling recently touched its lowest points against the US dollar in over 30 years following the June 2016 referendum vote for the UK to exit the European Union, with GBP joining the South African rand, Turkish lira and Argentine peso among those that have experienced periods of rapid depreciation.

The impact of currency volatility on the balance sheet of any multinational company can be severe, making foreign currency hedging an important part of corporate treasury’s toolkit. Yusen Logistics is a case in point. Established back in the mid-1950s, the company has developed into an award-winning global logistics provider offering expertise and services in freight forwarding and transportation. A subsidiary of the major Japanese shipping company Nippon Yusen Kaisha, today’s Yusen has global annual revenues of around €1bn, with 475 offices around the world and a workforce of more than 20,000 employees. Over the past three years the company has invested billions of yen into its five main regions of operation: Japan; the Americas; Europe; East Asia; and South Asia and Oceania.

As the company states in its annual report, it has various foreign currency-denominated claims and obligations, and “uses forward exchange contracts to reduce the impact of currency exchange rate fluctuations”. Figures included in the financial statements for its overseas consolidated subsidiaries are converted into Japanese yen when the statements are prepared, so currency fluctuations impact on both its business performance and financial position.

 Xavier Szebrat

Xavier Szebrat

Deutsche Bank’s VP risk management solutions

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At the EuroFinance 2019 international treasury management conference, held this year at Copenhagen’s Bella Center from 16th to 18th October, Yusen’s CFO for its German operations, Stefan Karenfort will take to the stage with Xavier Szebrat, Deutsche Bank’s VP risk management solutions to describe how technology is being applied to automate the company’s foreign currency hedging.

The Day Two afternoon session, titled ‘Putting the robots to work for FX risk management and liquidity’, will outline the initial hedging attempts and challenges in applying automation to reduce Yusen Germany’s FX risk and enhance liquidity management. It’s one of three consecutive presentations under the theme ‘From pilot to problem solved’, examining how the relevant technologies and providers can be identified and put to work for specific treasury tasks.

 

Two-stage adoption

Karenfort outlined Yusen Germany’s hedging strategy earlier this year at the Association of Corporate Treasurers’ (ACT) conference in May. He reported that division participates in a global netting scheme to settle intra-group transactions. This is denominated in US dollars as the leading currency, but the company is exposed to 16 different currencies in all with JPY and GBP also major exposures after USD.

Yusen Germany had experienced specific challenges around managing FX volatility; due largely to the timing difference between when a USD invoice is issued and payment is actually received. In 2017-18, foreign currency losses totalled around 0.5% of the company’s gross revenues and put pressure on the local management team to address the exposure. Hedging using traditional forward FX deals had proved unsatisfactory, so in the past 18 months the company has worked with Deutsche Bank as its leading banking partner in developing an automated solution using the bank’s Maestro platform.

The EuroFinance presentation in Copenhagen will also describe the two-stage adoption involved in adopting Maestro, to provide both balance sheet hedging of accounts payable and accounts receivable, and enhancement in working capital by addressing foreign cash operations.

"Initial attempts to address FX exposure proved ineffective, but Maestro enables Yusen Germany to significantly reduce FX risk, while gaining efficiency and transparency in trade execution"
says Szebrat

The company now uploads the net exposure from accounts receivables and payables into Maestro and the system then converts the net exposure into a hedge, which can be drawn down automatically by means of a swap whenever cash is coming in. Otherwise, Maestro automatically carries forward the hedge to ensure Yusen Germany is fully protected at all times; an option that the company finds simpler and less time-consuming than managing FX forward deals and foreign cash using traditional methods.

“Having worked at three global banks, this solution is the most advanced combined risk reduction and cash management automation system I’ve been exposed to. It is helping the corporate treasurer in ways I did not think possible,” says Szebrat.

The presentation has also been developed into a white paper by Szebrat and colleague Jay Hoffmann, with Karenfort as co-author, which will be available on flow shortly.

Xavier Szebrat and Stefan Karenfort are speaking 2:oopm to 2:40pm on October 17 at Discovery Lab 1 at the EuroFinance International Treasury Management Conference 2019, Bella Center, Copenhagen.

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