How to optimise currency management

Major multinational corporations are increasingly faced with the need to manage different currencies, often having to open multiple local accounts in their trade partners’ countries. Foreign exchange transaction costs, country risks, bank counterparty risks, the proliferation of administrative procedures and need for liquidity management can often end up putting a strain on the profitability of an activity. For businesses that are active internationally and/or with sites abroad, using multi-currency centralisation to simplify currency flows, protect themselves from currency fluctuations and secure and optimise liquidity is a core issue. All this while complying with local regulations.

1. Simplify and secure currency flows… to over 180 countries

When they need to make one off commercial payments in currencies that they do not operate (no account open in the relevant currency), companies are used to bank offers whereby they transfer funds in the required currency out of an account in one of their operating currencies, with the exchange transaction at the spot rate. Societe Generale offers a wide choice of ways in which to send and receive these types of flow.

However, while international exchanges are still currently dominated by Euro and US dollar transactions, there is no question that emerging and developing countries are more and more involved in international trade. Exchanges with these economies are creating new needs in terms of the range of currencies used. Many companies wish or are required to carry out their transactions in local currencies, which are also known as “exotic currencies” because they are marginal on the exchange market, with weak liquidity and often increased volatility.

Whether to pay for imports (goods and services), settle local expenses (investments, salaries, etc.) or pay into a locally established site’s account (where local legislation permits), Societe Generale has created a solution: the Exotic Exchange (Change exotique). With this payment offer, transfers can be instructed in local currencies from a single currency account: the transfer and exchange happen simultaneously.

The Exotic Exchange solution provides:

• access to over 100 currencies and 180 countries worldwide,

• a known exchange rate at the time of the transaction,

• full control of the payment by the issuer,

• a guarantee for the beneficiary that they will be credited with the full amount transferred (no destination fees)

Societe Generale has developed a differentiating offer, provided by very few banks worldwide. The offer ties in the bank’s expertise in International Trade, its knowledge of local legislation and the power of its global network, as well as the know-how of its trading rooms in currency transactions.

As it tracks developments in international exchanges, the “Exotic Exchange” solution meets the needs of businesses of all sizes, as wells as banks and financial institutions.

2. Protection against foreign exchange risk

Foreign exchange risk can impact the financial results of a company with cash flows linked to import/export activity, but also those of companies with international subsidiaries when accounts are consolidated. For example, recent fluctuations not only in major currencies – the US dollar, UK pound and Yen, but also in emerging and exotic currencies have had a major impact on results for Euro zone businesses.

Implementing solutions that hedge this risk is therefore an essential part of any optimisation strategy for currency management. Depending on the currencies involved or the nature of the transactions, various solutions can be implemented by the Societe Generale currency trading specialists.

IDENTIFYING HEDGING NEEDS

Faced with exchange rate volatility, a company can be exposed to an unfavourable shift in the currency between the negotiation and payment dates of a transaction, which may alter profit margins or even generate a loss.

Solutions to hedge this risk are diverse, flexible and adjustable, to meet a company’s specific needs. They vary depending on:

• the transactions involved: import/export, etc.,

• the flows: certain or uncertain (call to tender, etc.), their volume,

• the currencies used,

• the price fix dates.

HEDGING STRATEGIES

Societe Generale offers its customers a full range of hedging solutions. Depending on the sums involved and strategies anticipated, the customer is given direct access to the services of the trading room, through a dedicated specialist contact.

Societe Generale provides all its expertise to the customer, through quality of advice (currency exchange specialist), quality of execution (infrastructure of a European corporate and investment bank with a global presence), services with high added value (research, risk management advice, managing regulations) and tailored hedging solutions that are truly adapted to the customer’s needs (thanks to our financial engineers’ ability to innovate and to the expertise of our traders who know how to exploit opportunities provided by very volatile markets).

Firm commitment hedging

Simple forward transactions for definite flows: these fix the price that will be applied at a future date, so providing a guaranteed hedge. Societe Generale guides you through its Classic and Flexible Forward exchange products.

More informations : Import-Export Solutions Website

• Classic Forward Exchange: the company guarantees a buy or sell rate for a future transaction in specific circumstances: direction, amount, currency, maturity date. The hedge can still be unwound before the maturity date (premature termination or delivery) by way of the payment or receipt of a premium or discount reflecting fluctuations in the rate between the Euro and the other currency.

• Flexible Forward Exchange: the company sets an amount of currency to be hedged, for purchase or sale, and a maturity date before which the total amount will be used. Societe Generale sets an exchange rate that is guaranteed for all transactions during the entire period of the contract. Available in ten currency pairings, this solution provides the same guarantees as the Classic Forward Exchange, while at the same being able to hedge a flow of business, adjusting the use of the hedged currency to the relevant payment dates.

In both cases the overall volume of business hedged must be fully controlled and certain, because a Forward Transaction is a firm contract that must be honoured, even if commercial contracts are cancelled, which might then place the company in a speculative situation.

Options hedging

Given their nature, these hedges can only be proposed by trading room specialists. They need constant monitoring and active management throughout their term.

They range from outright options and simple option products, which guarantee an amount of currency at a predetermined price at a future date, to so-called optimised strategies, which do not offer a certain hedge but give the company the opportunity to optimise their currency flow management (for instance by improving the buy price on a currency, by way of accepting uncertainty on the amount bought).

• Outright options

These guarantee a price at a maturity date and for an amount fixed when the contract is signed, while offering the opportunity to benefit from a favourable shift in the exchange rate, by paying a premium. There are buy (call) and sell (put) options.

• Simple options strategies

Combining call and put options, these can guarantee a price and amount on a given date, while benefitting from a favourable shift in the exchange rate, in line with parameters set in advance, all without paying an option premium or paying a reduced premium. The put option premiums finance the call option premiums.

Examples of parameters for benefitting from exchange rate improvements up to a level set when the contract is established:

– participation up to a certain percentage of this improvement (50%, 40%, 60%, etc.)

– 100% participation in the improvement up to a certain level, at which point the original fixed rate once again applies,

– etc.

• Optimised options strategies

For companies with major flows, which may be multi-currency, specialist advisors from the Societe Generale trading room offer optimised strategies which can only be adapted to provide hedging at the macro level, or to optimise all of their flows.

The aim generally is to achieve a hedge rate that is better than the one noted when the hedge was put in place, while paying a reduced premium or even no premium at all (by balancing the premiums paid and received).

These strategies are only appropriate for an informed and/or expert customer, as stipulated in the MiFID (Markets in Financial Instruments Directive).

They are options combinations whereby currency flow management can be optimised to:

– improve the guaranteed price in relation to the classic forward rate to a greater or lesser extent

– and sometimes, to benefit from favourable currency shifts according to certain parameters set at the start.

These strategies, because they have a leverage effect, include uncertainty on the amount hedged (which can lead to no hedging at all). This is why this is not a definite hedge, but of optimising currency flow management.

3. Optimise liquidity management

Business carried out by major multinationals, characterised by large import/export volumes and often with international establishments, requires their treasury teams to manage a wide range of bank accounts and currencies. Optimising liquidity is a major factor in the good financial health of a company. Centralising cash-flow is a key step in achieving this aim.

Furthermore, the current international context imposes greater caution when managing country risk and so when positioning a group’s liquidity.

Societe Generale offers its corporate customers several approaches to optimising multicurrency liquidity management, depending on the extent of centralisation they want in their cash-flow.

In all cases, these solutions can be adapted to the customers’ varied organisations, whether their treasury teams are dispersed across all subsidiaries or centralised within a single entity (central corporate treasury).

OPTIMISING INTEREST

A company may wish to optimise its currency cash-flow without any particular wish to centralise its organisation.

In this instance Societe Generale can offer a simple solution to optimise interest. In whatever countries the company holds its currency positions, if the currencies are held within the Societe Generale group, the company can benefit from improved conditions for interest. These improvements increase, the more the sums held in the various currencies balance one another.

In this way the company benefits from a reduction in its bank interest charges, without physically having to balance opposing positions in different currencies, thereby avoiding the need to perform exchange transactions and incur the associated fees.

CENTRALISED AND SIMPLIFIED MANAGEMENT OF MULTI-CURRENCY LIQUIDITY

A company may wish to go further and seek physical centralisation of its multi-currency cash-flow, as part of an optimisation process for its overall liquidity.

Societe Generale has high added value solutions to meet this need. All of the company’s currency positions are first physically brought together at Societe Generale in London or Amsterdam. Notional management of these centralised positions enables the treasurer to avoid the need to manage currencies: they can choose to invest or borrow on the basis of a notional net balance, in the currency of their choice.

This system has the advantage of limiting or even removing exchange costs: the need to exchange is avoided through the notional balancing of the currency positions. This also helps the company to rationalise costs through centralisation and reductions in the treasurer’s work load. With the liquidity lodged in London or Amsterdam, the company reduces its exposure to certain country risks. Finally, the solution improves the group’s ability to self-finance and enables it to benefit from optimised interest conditions. This delivers an overall improvement for its financial returns.

In the unstable international economic environment now facing companies, the need to simplify currency flows, protect against foreign exchange risk and optimise multicurrency liquidity management is more pronounced than ever. Among factors influencing the profitability of their activity, these are significant items than can have a major impact on their results.

The Societe Generale group, with its business line expertise, its extensive international network and its strong presence in emerging and developing countries, is perfectly positioned to propose the most sophisticated solutions to support its customers in their international affairs. The partnership the group wishes to establish with them is based on understanding their issues and specific development strategies: to do so it brings to bear the skills and synergies available through experts from its various business line teams.

(May 2014)