From the February 2007 issue of Treasury & Risk magazine

Knowing When To Call In The Big Guns

Sometime in 2002, Scott Tsujita had finally had enough. The senior vice president of finance, treasury and investor relations for $245 million Hypercom Corp. was tired of relying on bankers for all his foreign exchange and hedging information. Although the Phoenix-based company's exchange rate exposure is in the form of receivables and payables involving overseas suppliers and customers spread across 30 countries in 15 currencies, Tsujita would readily admit to not being an expert in "all the things that go with internal exposure reporting and managing foreign currency risk." Says Tsujita, "I was looking for an independent third party between me and the banks to advise me on how to get the best hedge rates, timely information about currency movements, and how to track our exposures on a more timely basis."

Tsujita hooked up with FiREapps (then known as Rim-Tec), a foreign exchange management solution provider, to develop a more hands-on approach to Hypercom's currency management processes. During the four years of the relationship, FiREapps has helped Hypercom retool its reporting processes and its measurement and execution of hedge contracts at price points that are consistently better than what Tsujita was getting on his own. "Unless you're a foreign currency trader, when they tell you a spot rate, you really don't know how much of a premium has been built into the quote at the time of a forward contract execution," says Tsujita. "It's difficult to measure unless you have real-time spot rate information."

Hypercom's Web-based trading system provides a view of exchange rates offered across multiple financial institutions and the premiums involved, allowing Tsujita to decide whether the cost of a hedge is worthwhile relative to the exposure risk on the company's books. Tsujita is now in the process of incorporating FiREapps' latest application that will export all of Hypercom's foreign currency exposure data from the company's Oracle database in real time; run diagnostic reviews; and allow Tsujita to quantify exposure by currency pair, by entity and in aggregate. The system also contains a decision-making module to help determine the lowest-cost hedging strategy.

The improved organization has allowed Tsujita to centralize foreign currency conversions at lower cost. If a regional controller in Australia needs to convert from U.S. to Australian dollars, rather than have that controller negotiate with a local bank independently, all those conversions are consolidated and executed through a single financial institution. Thanks to the long list of improvements, Tsujita estimates the company has shaved nearly two percentage points (as a percentage of revenue) off its foreign exchange financing expenses over the last four years, saving more than $4 million annually.

For some treasuries, it may take a large, unhedged loss they never want to experience again; for others, it might be a drive to better control the costs of hedge contracts or a need to centralize a global currency program. Whatever the reason, even companies with years of experience get to a point where their knowledge of instruments, access to market information or basic strategic approach to financial risks could use a technological boost. And the good news is that the number of choices for consulting and automation help in the financial risk management space is growing and becoming more affordable for companies of all sizes, but especially for smaller finance departments. "The criterion is actually not the size of the company, but the sophistication of the people in a treasury department," says David Gershon, president and CEO of SuperDerivatives Inc., a provider of hedging solutions. "We've seen small companies with very smart guys in their treasury department that will make a lot of money and people at large corporations where they tend to do less transactions and are a bit lazy."

But the decision to open up an organization to outside hedging expertise can be a lot more rigorous than merely plugging into the latest hot app. Companies should be prepared to think hard about their internal processes to get the maximum impact of a hedging overhaul, argues FiREapps CEO Wolfgang Koester. "If companies want to minimize their exposure, they've been educated by the banks over the last 10 to 15 years to answer the question 'Do I hedge or don't I hedge?'" says Koester. "But reducing exposure is not that black-or-white. Instead, companies should look at their processes, which means define exposures and ask, 'Is there anything that can be done prior to going to the bank to put derivative products on?' In almost every case, the answer is 'absolutely.'" He estimates that companies can reduce their exposures by 30% or more through better coordination and collaboration between departments and geographically disbursed operations, a process of getting closer to the pulse of the exposure.

Of course, smaller companies often don't have the manpower that larger finance departments have for organizing and maintaining oversight for all operations worldwide. Automation provided by best-of-breed vendors like FiREapps and SuperDerivatives helps to fill in the gaps by working through the risk-decision-making process, with considerations made for established currency risk management policies, such as what premiums a company is willing to pay to hedge a particular exposure. In some cases, the current technology balances several risk exposures at once. Super-Derivatives' technology specializes in helping users select from many possible strategies to handle multiple risks simultaneously, including interest rate and commodity risk in addition to currency exposures. "Our ability is to give users a report that basically links risks from different assets with one system," says SuperDerivatives' Gershon. The Web-based application also provides educational materials on such things as when a strategy based on options contracts is preferable to one based on more restrictive forward contracts. The system's on-demand structure means that users pay for just those applications that they use.

The large commercial banks are also not standing still when it comes to expanding financial risk management tools and advice for the middle market. For the most part, the solutions provide a single-bank view of hedging services and premiums, without the view across multiple banks--which at least some midsize finance departments say they want.

John Bird, head of the portfolio and risk strategy group at Bank of America, sees the rise of FAS 133 as a key driver for many midsize companies seeking more outside advice. "It raised the hurdle on the amount of education they had to have to hedge and apply hedge accounting," says Bird. Even private companies that don't need to comply with FAS 133 have hired the bank to create risk policy statements required by the rule and to advise them on hedging strategies.

The large banks are also leveraging on-the-ground expertise that cannot easily be duplicated, especially in remote locations. "As growth continues in emerging markets--the Chinas, the Indias and Brazils of the world--and the more companies expand overseas to capitalize on it, the more they need someone's help to do it," says Ron Chakravarti, director of global transaction services at Citigroup.

At JPMorgan Chase & Co., a team was created two years ago to offer a fuller range of financial risk services to companies with revenues generally up to $2 billion annually. Those services include how to operate under local regulations as well as more day-to-day strategic advice, such as when and how to hedge a particular currency position. "We make our 50-country network of bankers available to clients, and with trading capabilities in 60 different currencies, we can deliver to middle market clients a pricing advantage," says Morgan McGrath, managing director and head of international banking for the commercial bank at Chase. Solutions such as autoFX allow the bank to offer real-time trading technology linked directly to the markets.

But it's not always about the technology; sometimes it's about getting an objective outside opinion. That was the case when Icicle Seafoods, a privately held, Seattle-based harvester, processor and marketer of seafood products, hired currency consultants HiFX PLC. Icicle derives one-quarter of its $300 million in annual revenues from sales in Japan, much of it denominated in yen. Yet up until several years ago, it would rarely use hedges, choosing the more risky tack of converting sales yen to dollars on the spot market. But as competition in the worldwide seafood market has risen, Icicle has been forced to take a sharper eye to cost-cutting and managing risks, says Dennis Guhlke, the company's vice president of finance. Eighteen months ago he hired HiFX. One factor in his decision, says Guhlke, was the murkiness in bank spreads for the size of the trades he was doing. "We've had good input before from our banks, but this is an independent voice that's a specialist, and it's more input to help us make better decisions."

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