By Katie Hoffmann and Joseph Galante
July 22, 2010
EBay Inc., International Business Machines Corp. and Delta Air Lines Inc. all pinned part of the blame for disappointing 2010 forecasts or second-quarter sales on the same culprit: the weakened euro.
The European currency averaged $1.27 in the quarter, the lowest in more than four years, hurting sales at companies from technology businesses to jet-engine manufacturers. So far in this earnings cycle, Standard & Poor’s 500 Index companies are trailing analysts’ profit estimates at almost twice the rate of the first quarter, Bloomberg data show.
Wolfgang Koester, who leads FiREapps, said calls to his currency-strategy business have increased fivefold in the past six months, as companies race to figure out how to diminish the impact of exchange-rate fluctuations.
“We used to just get foreign-exchange managers calling us,” said Koester, whose Scottsdale, Arizona-based company makes technology to manage financial risk. “Today, it’s the treasurer, the CFO or sometimes even the CEO calling us directly. There’s a trend of urgency.”
BY MICHAEL CASEY
Managing companies' exchange rate risks often involves more art than science, as is clear from a slew of earnings results after an especially volatile quarter in currency markets.
The problem is that many companies with large global operations still manage their myriad currency exposures with traditional, backward-looking strategies--rather than using new technologies that would allow them to adjust to exchange rate changes in a more dynamic, real-time fashion.
Companies are generally loath to provide sensitive information on their hedging strategies, which makes it hard for analysts to predict how currency volatility will affect their profits. So after a quarter like ...
Wall Street Journal
By Emily Maltby
Small-business owners that depend on China for manufacturing, cheaper raw materials and inexpensive labor are bracing for the potential revaluation of China’s currency.
...
With revaluation a strong possibility, small-business owners—particularly those who have come to rely on lower costs overseas—need to contemplate a new reality. “Businesses need to do a sensitivity analysis to know the impact on the organization if the currency moves 1%, 5%, or 20%,” says Wolfgang Koester, chief executive of Fireapps, the foreign-exchange exposure division of risk-management firm Rim Tec, Inc. in Scottsdale, Ariz.
...
The revaluation isn’t likely to be as aggressive this time. But an appreciation could sneak up and catch an established business model off guard.
“People have been aware of the dollar-yuan rate, but the vast majority have not done much about it,” says Mr. Koester. “They have different priorities because it’s not happening yet and people tend to be reactive to these events.”
A new technology collaboration can help companies fine-tune their foreign-exchange hedges.
Alix Stuart, CFO.com | US
December 2, 2009
On most counts, Google had a great third quarter. The Internet giant reported its revenues grew for the first time in 2009, coming in 7% higher year-over-year, while profits rose 27% year-over-year. But CFO Patrick Pichette still saw something missing: $300 million. That's the amount he says foreign-exchange fluctuations took out of the company's total revenues, and that he is trying to recapture through an intense currency-hedging program.
With about half of its revenues currently coming from outside the United States, Google uses cash-flow hedges to protect earnings and transaction-related hedges to protect foreign-denominated receivables. The company's foreign-exchange-related costs increased by a net $126 million in the first nine months of the year, according to its latest 10-Q, and Google expects to boost spending on hedging even further as revenues increasingly come from other parts of the world.
"We're putting a lot of science into this," Pichette told an analyst in the company's third-quarter earnings call. Part of that science involves technology; namely, a new collaboration between Sungard and Fireapps that has afforded treasurer Brent Callinicos better insight into Google's foreign-exchange exposures over the past year or so. In October Sungard, a leading provider of treasury-management systems, announced that all of its customers would be able to access Fireapps's foreign-exchange-exposure tracking and management services through its systems (for an additional charge).
In partnering with Fireapps, Sungard "is enhancing its solutions and at the same time really going after a pain point," says Laurie McCulley, a principal in consulting firm Treasury Strategies's technology practice. Gathering data to calculate foreign-exchange exposures and determine optimal hedge strategies is still a struggle for many companies, she says, because standard treasury workstations have only limited capabilities to capture foreign-exchange data. In most cases, the process is manual intensive, with employees manipulating days-old data from various divisions or subsidiaries into spreadsheets.
In contrast, Fireapps gets the data directly from ERP systems and feeds it into the treasury-management system. That eliminates two steps from the process and provides fresher data, says McCulley.
Callinicos says one of the service's key benefits is that it enables him to see net exchange-rate exposures rather than just one or two exposures at a time. That's important, he says, because with so much cross-currency data, "having only a few pieces of information can lead you to overhedge, which you never want to do." The system also allows him to do more hedging, since it tracks more currencies than he and his team could using the old system.
While Callinicos can't quantify the savings, "the difference between having the system and not having it is material," he says. Google recognized $316.6 million in hedging gains to revenue in the first nine months of the year.
Corporate Board Member
By Wolfgang Koester
At a time when managing risk and cutting costs are at the top every corporate board agenda, the majority of U.S. multinationals have been forced to explain substantial, unanticipated foreign exchange (FX) losses in the third and fourth quarter. While FX gain/loss has not traditionally been managed as a business cost, its impact on quarterly earnings in the second half of 2008 was unmistakable—but not unavoidable.
The combined effects of increased globalization and currency volatility, including some recent dramatic directional moves, have affected company earnings and share prices, and painfully reminded corporate board members and senior executives that foreign exchange is the cost of doing business internationally. The good news: rather than accept these costs, multinational companies can control and manage them by understanding the sources of exposure and managing them with smarter processes.
The Dollar May Be Up, But Are You?
Not every CFO is happy about the dollar's rapid rebound, as many American companies with significant overseas sales found themselves in trouble this fall. After a 4 percent revenue boost from a relatively weak dollar in the second quarter, Oracle co-president (and former CFO) Safra Catz expected currency fluctuations to create a 3 percent drop in revenue in the third quarter. The fourth quarter doesn't look much better…Corey Edens, CFO of currency management software company FiREapps, says the company often finds “ticking time bombs that could materially impact performance and the ability to reflect [foreign exchange] gains and losses” in consulting with potential clients.
Making the Case for Change: Protecting Corporate Value from FX Risk (PDF)
"This month, we will look at how treasurers can prepare to make a solid business case for improving FX exposure management processes in way that tackles the status quo head on by demonstrating economic, compliance and business process improvements with a clear ROI to the organization."
Non-Standard FX Operating Procedures(PDF)
This article provides an understanding of how FX issues related to people, processes and
systems can pose a threat to your enterprise.
Five Questions Treasurers Need to Ask About Multicurrency Accounting (PDF)
This article highlights the questions that treasurers should be asking controllers about multicurrency accounting data and processes in order to take control of FX volatility.
Managing FX Risk from the Bottom Up
When it comes to foreign currency exposure management, its the foundation thats all too often overlooked. That foundation comes from source transaction data for foreign currency business transactions maintained by the finance organization in the enterprise resource planning (ERP)/accounting systems. The assumption that this data is accurate and reliable is the leap of faith that treasurers must make as they build a strategy to withstand the winds of change that threaten the value of their firm. As experience has shown us time and again, treasurers need to look before they leap.
