Case Study #1 – Income Statement volatility
Reducing impact on GAAP earnings
Situation
A public health care firm with a maquiladora facility and sales in several countries experienced volatile FX swings, and multi-million dollar FX losses for several consecutive years.
Actions
1. Company performed an analysis of it’s non-USD activities to identify components of USD FX volatility, identifying several balance sheet items in particular (short term loans, intercompany working capital accounts)
2. Company established Board approved FX policies, and worked closely with auditors to establish “hedge effectiveness” for contemplated basic “forward contract” hedges.
Results
1. Total FX volatility consistently reduced below $100K in subsequent years
2. Auditors signed off on program, allowing hedges to be classed as “effective”, avoiding the requirement for revaluation of open hedges to flow through the P&L .
Case Study #2 – Cashflow uncertainty
Financial statements often do not capture the most significant economic effects of currency volatility.
Situation
A company operating in multiple countries had limited pricing power to offset FX volatility, partly due to local market (native currency) competitors. The FX impact on the company’s margins (revenue and COGS) for future transactions is not captured in financial statement reporting.
Actions
1. Company established “budget rates” as part of annual planning cycle.
2. Hedges for anticipated transactions were contracted using the budget rates. Hedges included purchased “vanilla” options (calls, puts, collars)
3. Board and auditors were advised in advance of hedging process
Results
USD cashflows exceeded hedged values by over 5% for three consecutive years.