Managing FX Risks Effectively

Helping Corporates Stay Risk Neutral in the Midst of FX Volatility

Key takeaways

  • In order to tap into new foreign markets, companies may need to be able to price or invoice upfront in the local currency.
  • As companies broaden their supplier base internationally, they also may need to be able to pay in the local currency.
  • CashPro Flow provides corporates with the ability to seamlessly invoice in foreign currencies and facilitate automated matching and reconciliation.

The world has become a smaller place and certainly more interwoven economically, with companies of all sizes searching globally for untapped markets in which to sell goods and services, yet imports and exports generate only a portion of today’s foreign exchange (FX) transactions.  An ever-larger portion results from e-commerce, stemming from companies exporting music, games and other digital applications over the Internet. And growing even faster, if their stock prices are any indication, are companies brokering services in the shared economy, enabling individuals to rent out their homes, automobiles and other possessions to people from anywhere in the world, paying and receiving in desired currencies.

 

All those transactions create FX exposure, which poses challenges to treasurers in managing their companies’ cross-border, cross-currency receivables and payables.

A more strategic approach

Treasurers today are being asked to address this FX risk in new ways. What once was a more straightforward role is now more strategic, as treasurers are being mandated to manage more aspects of risk, including counterparty, transactional, economic and operational risk.  That means banks need to find ways to eliminate the FX friction their customers are dealing with in the daily operational cash flow.

 

In order to tap into new foreign markets, companies need to be able to price or invoice upfront in the local currency, so their local customers enjoy an easy, convenient paying experience, without having to take on the FX risk.

 

Similarly, as companies broaden their supplier base internationally, they also may need to be able to pay in the local currency. This helps mute the FX noise in dealing with suppliers and reduce the hidden buffer that suppliers may add on to protect themselves from FX market fluctuation.

 

By essentially shifting FX risk management to the bank, corporations can focus on their international expansion, customer acquisition, and forging stronger relationships with their customers, suppliers and vendors.

Guaranteed rate transformed

Guaranteed rate is not a new concept in the FX payment space. But with a limited guaranteed period (e.g., 24 hours or a few days*), it has not been geared up to support companies’ receivables and payables cycle, which runs up to 1-3 months or even longer.

 

When guaranteed rates are mentioned, treasurers tend to assume such rates may not be competitive. However, new solutions are emerging that not only significantly extend the rate-guarantee period but also address long-vexing FX-market issues faced by corporates, including a lack of transparency, rate competitiveness and burdensome administration. Those benefits also extend to the companies’ trading partners.

 

By helping clients get a better rate, transparency upfront and greater efficiency, we’re helping them provide a better experience for their customers and suppliers, so it’s good for their overall business expansion. Bank of America’s CashPro Flow guarantees rates up to six months. Building upon the predictability of corporate payment flows — receivables from customers and payables to suppliers — the bank makes it possible to offer a longer-dated guarantee with competitive pricing. The extended period comes at the request of the bank’s clients, as their payments continue to increase in volume and complexity.

The beauty of transparency

Wiring payments overseas to pay suppliers in other currencies has long presented challenges. A U.S. manufacturer wiring funds to pay for widgets imported from an overseas vendor typically alerts its bank, which in turn sends payment to the vendor’s bank, which rarely discloses its lifting fee, comprising the spread it charges and processing fees. In addition, the funds may take one to several days to appear in the vendor’s account. If the lifting fee is higher than anticipated, the payment could fall short. The funds could also arrive late.

 

Neither outcome is good for business, potentially generating friction with the overseas supplier and damaging the trading partners’ long-term relationship. However, guaranteeing the FX rate gives transparency to both sides of the transaction and can eliminate the emergence of such friction, as well as the possibility of vendors overinflating invoices to cover unanticipated currency fluctuations. See figure 1.

Infographic

On the receivables side, the corporate’s customers know upfront what they must pay in the local currency. In addition, invoicing customers in their local currency allows them to avoid having to do a currency conversion at their local bank and then wire the payment. Instead, they can use their local payments systems, potentially reducing costs and almost certainly providing a better customer experience — always a plus in terms of fostering a long-term relationship. Even if a wire is necessary, it won’t require a conversion.

In summary

Back-end reconciliation of FX transactions in two currencies is time consuming and prone to errors unless automated. Bank of America CashPro Flow is fully integrated with its reconciliation software, providing corporates with the ability to seamlessly invoice in foreign currencies and facilitate automated matching and reconciliation. Such automation can result in significant cost savings and effective FX risk management.

 

Going forward, treasurers will focus on building greater visibility and control over their data in order to effectively manage the evolving risks that come from companies expanding and globalizing. This is where cash management banks can provide real added value.

 

#1BofA terms and conditions apply. Term of BofA’s guaranteed rate varies.

 

All services/products may not be available in all jurisdictions and/or may not be available as of the date noted and are subject to local regulation and to change without notice.