Managing FX Risk: An Eight-Step Plan to Establish a Corporate Foreign Exchange Policy

The following is an interesting article from the Wells Fargo Treasury & Risk Magazine. It was written by Dave Napalo, Senior Vice President, Foreign Exchange Division, Wells Fargo.


Following the corporate failures of recent years, the Sarbanes-Oxley Act
(SOX) has set in motion a grounds well of changes in corporate governance and
risk compliance. Corporations have been challenged to respond to the proliferation
of new standards that establish measurements for good risk management practices. The requirement for impeccable financial controls has touched virtually every area of
a company’s business. The reach of SOX has clearly extended to the practice of foreign exchange (FX) risk management, an area already thrust into the spotlight due to the market volatility
that has prevailed for some time. As a consequence, many corporations have
undertaken an assessment of whether their FX risk management practices are appropriate
for their underlying exposures, as well as whether their financial controls pass muster in a SOX environment. As part of that process, a sound formal policy for FX risk management is a major
step towards satisfying the new standards for financial controls. The policy must lay out clear mandates for action and governance with clearly defined responsibilities. To craft a policy, we recommend an eight-step approach:

STEP ONE: DEFINE CORPORATE PHILOSOPHY AND OBJECTIVES

The first step is to establish a framework for the policy. It outlines the principal business
lines and overall corporate objectives and stipulates those areas where the company
is prepared to take risk. For example, a company in the laser technology field might
recognize that risks necessary to remain at the cutting edge of research cannot be
hedged away. Conversely, most companies will identify risks that can be hedged away
– for example, foreign exchange, interest rate and commodity risks that may affect
financial performance. In most cases, companies state their intention to offset their FX
risk since it is not an area in which the company has a competitive advantage.

STEP TWO: IDENTIFY EXPOSURES

The next step involves identification of major exposures – generally, these exposures
are grouped under the headings of transactional, translational and economic
exposures. Transactional exposures wouldrelate to buying or selling in any foreign
currency. Translational exposures would relate to protecting the value of overseas
investments and reported income. Economic exposures might be the most difficult
to capture because they relate to issues that usually arise from foreign competition.
It is also useful to include as an addendum to the policy a glossary of
terms, including acronyms that are unique to a company’s practices and operations.

STEP THREE: QUANTIFY EXPOSURES

This step measures the degree of importance of the exposure. The specific measurement
technique can vary. Some companies may use sophisticated modeling techniques such as value-at-risk to measure exposures. Equally valid approaches are simpler and rely upon measuring recent historical changes of currency relationships and their impact on exposures. Whatever the approach, the objective is to define which exposures are significant. Any hedging activity should be proportional to the exposure.

STEP FOUR: DEFINE RISK MANAGEMENT POLICIES AND PROCEDURES

In this step, specific actions and responsibilities are identified. Those exposures that
present significant risks to the company are identified and designated for hedging. The chain of responsibility for making decisions and executing them is formally established. Ranges of acceptable hedging activity should also be established. For example, a company might elect to hedge no less than 50% but no more than 80% of forecasted foreign sales over a specified
time period. Each exposure must be systematically addressed. This step will necessarily be complex as it represents the heart of any hedging policy. Most companies include in this section an explicit statement that speculative activities should not be undertaken under any circumstances. Speculative activities would include any action that would add to, rather than
reduce, the financial risks of the company.

STEP FIVE: IDENTIFY STRATEGIES TO MANAGE RISK

In this step, derivative strategies to managerisk are explicitly identified. Approved
derivatives will reflect the procedures established in Step Four. In order to provide
additional flexibility, most companies will specify a range of approved derivatives,
including forward contracts, purchased options, and forward-equivalent option-combination strategies. The specific hedging technique selected will depend on the circumstances of each exposure. For example, if certainty of an outcome is the main objective, forwards are likely to be
the required derivative. Alternatively, for competitive reasons, a company may need upside potential from currency movements. In this case, authorizing purchased options and option-combination strategies will provide the desired trade-off of protection against adverse market moves while preserving upside potential from the underlying exposure. It is advisable to provide a broad choice of hedging instruments at the outset since amending the policy later to
include more choices is usually administratively burdensome.

STEP SIX: EXECUTE STRATEGIES

This step governs the actual execution of a derivative instrument for a hedge. The individuals
approved to enter into transactions would be identified. Levels of approval based upon size or nature of transaction would be specified. A counterparty or counterparties, together with credit limits for outstanding positions, would be established. This step also includes implementing
appropriate internal controls, including independent confirmation of trades.

STEP SEVEN: MONITOR EXPOSURES AND HEDGES

Once risk management actions have been taken, the process does not end. Monitoring
must become a standard practice:

• The hedge actions need to be monitored for performance, as FAS 133 requires a company to reflect the mark-to-market results of the derivatives in financial
statements.

• The underlying exposures must be monitored on an on-going basis to insure
that the position does not become over or under hedged.

• Responsibility for the appropriate measurements needs to be defined.

• The chain of responsibility to whom the results are communicated and in what format should be established.

• An escalation procedure should be in place if there is ever any evidence of an erroneous outcome or impropriety.

• Finally, there should be a secure set of controls for measuring the hedging outcome. Any spreadsheet used for measuring purposes should have a secure backupin an audit function. To the extent possible, hard-coded formulas should be used to avoid corruption of internal equations.

STEP EIGHT: REVIEW AND MEASURE PERFORMANCE

Risk management should be a process of continuous improvement. The policy itself
should be viewed as a living document. Within the policy, there should be an explicit commitment to review the policy on an annual basis to confirm that it is meeting its
compliance objectives of risk reduction and enabling the company to reach its financial goals. This process should be documented, reviewed, approved and signed so that the mandated officers can attest to the integrity of the provisions on an on-going basis.

CONCLUSION

The benefits of comprehensive FX risk management should be realized in a more predictable
and stable financial performance. A well-crafted risk management policy is an essential component of this process. Once goals and responsibilities have been made clear, every person in treasury will benefit from the well-defined mandate. The policy will provide a sound foundation for SOX compliance. And ultimately, the shareholders will benefit the most from improved financial controls and performance.

For more information about risk management and hedging, please register with ForexCT today and speak to one of our highly trained Forex Specialists!

Instant credit card deposit

There are many online brokers or Forex companies out there that offer you "Credit Card Deposit". However, what they don't tell you is that it takes 12hrs or 24hrs to process. This can be a pain, and could potentially cost you thousands of dollars. While you are waiting for your account to be credited with the funds, the market is going crazy and you have missed the train. How do you resolve this problem? The simple answer is ForexCT!

ForexCT provides an instant credit card deposit service. This takes only a matter of seconds. You enter your credit card details and the amount you want credited to your account, then your account is credited with the amount specified. This is so easy and convenient. You are also able to deposit into your account via bank wire transfer. We accept both methods...whatever is easier for you.

Our online credit card transactions are highly secure and are protected by 128-bit SSL encryption. The security of your private information is of highest priority to us.

Stop thinking about signing up to ForexCT - just do it! It only takes a few minutes. Once you register, you can log in to the platform and check it out for yourself. It is not difficult to understand and in fact it is very user-friendly. However, if you are having difficulty or if you even want to have a free trading tutorial, then we would be more than happy to conduct one with you. At ForexCT, we enjoy nothing more than introducing someone to the exciting Forex market. We get great pleasure from traders using our platform, and we enjoy teaching them how to use it. At the end of the day, it is vital that you feel confident using a trading platform. There is no point trading on a platform that you feel is too difficult to use or you dont understand. ForexCT aims to eliminate any lack of understanding traders have in relation to our platform or the Forex market in general. We strongly believe that education is the key to the Forex market and you should have a sound understanding of the market before you throw yourself into the deep end. Please contact us today to make a time for a FREE TUTORIAL with one of our highly skilled Forex specialists.

Weekly Country Focus: Switzerland

The economy of Switzerland is one of the world's most stable economies. Its policy of long-term monetary security and bank secrecy has made Switzerland a safe haven for investors, creating an economy that is increasingly dependent on a steady tide of foreign investment. Because of the country's small size and high labour specialisation, industry and trade are the keys to Switzerland's economic livelihood.

GDP Ranking (2007)
36th

GDP (2006)
CHF486.2, $371.5 billion

GDP growth rate (2006)
4.9% nominal, 3.2% real

GDP per Capita (Q2 '04 annualised)
$33,800

GDP by sector (2004)
agriculture (1.5%), industry (34.0%), services (64.5%)

Inflation rate (Q1 2006)
1.4%

Pop below poverty line (2005)
3.3%

Labour force (June 2004)
NA million (includes unemployed)

Labour force by occupation (2002)
agriculture (4.6%), industry (26.3%), services (69.1%)

Unemployment rate (2007 est)
2.5%

Main Industries
machinery, chemicals, watches, textiles, precision instruments

Trade
Apart from industry, trade has been the key to prosperity in Switzerland. The country is dependent upon exports to generate income and on imports for raw materials and goods. With the notable exception of a strict policy of agricultural protectionism, Switzerland has liberal trade and investment policies. An expansive commercial and bank law system makes Switzerland one of the most secure investment places in the world. The Swiss franc is one of the world's soundest currencies, and the country is known for its high standard of Swiss banking and financial services.

The machinery, metals, electronics, and chemicals sectors are known for precision and quality. Together, they account for well over half of Switzerland's export revenues. The country is approximately 60% self-sufficient, taking only 7.5% of its imports from the U.S.
Switzerland ranks 18th among the main trading partners of the U.S. worldwide. The Swiss economy earns roughly half of its corporate earnings from the export industry and about 70% of Swiss exports are destined for the EU market.

The United States is the second-largest importer (9.1%) of Swiss goods after Germany (20.0%). Germany, on the other hand, exports more to Switzerland each year than to all the countries of the former Soviet Union and Eastern Europe combined. In addition, the United States is the largest foreign investor in Switzerland, and conversely, the primary destination of Swiss foreign investment. It is estimated that 200,000 American jobs depend on Swiss foreign investments. Total U.S.-Swiss bilateral trade, nevertheless, decreased by 12% to $17.16 billion during 2002 compared to the previous year.

Economic policy

Terrorism
Through the United States-Swiss Joint Economic Commission (JEC), Switzerland has passed strict legislation covering anti-terrorism financing and the prevention of terroristic acts, marked by the implementation of several anti-money laundering procedures and the seizure of al-Qaeda accounts. Continued relationship with the United States through the JEC has brought the Swiss economy into closer proximity with that of the Western world, with mutualistic goals in terrorism prevention providing the impetus.

European Union
With exception of agriculture, economic and trade barriers between the European Union and Switzerland are minimal. In the wake of the Swiss voters' rejection of the European Economic Area Agreement in 1992, the Swiss Government set its sights on negotiating bilateral economic agreements with the EU. Four years of negotiations culminated in Bilaterals, a cross-platform agreement covering seven sectors: research, public procurement, technical barriers to trade, agriculture, civil aviation, land transport, and the free movement of persons. Parliament officially endorsed the Bilaterals in 1999 and it was approved by general referendum in May 2000. The agreements, which were then ratified by the European Parliament and the legislatures of its member states, entered into force on June 1, 2002. The Swiss government has since embarked on a second round of negotiations, called the Bilaterals II, which will further strengthen the two organisations' economic ties.

Switzerland has since brought most of their practices into conformity with European Union policies and norms in order to maximise the country's international competitiveness. While most of the EU policies are not contentious, police and judicial cooperation to international law enforcement and the taxation of savings are controversial, mainly because of possible side effects on bank secrecy.

Swiss and EU finance ministers agreed in June 2003 that Swiss banks would levy a withholding tax on EU citizens' savings income. The tax would increase gradually to 35% by 2011, with 75% of the funds being transferred to the EU. Recent estimates value EU capital inflows to Switzerland to $8.3 billion.

To learn more about Switzerland:

• Trade Balance
• UBS Consumption Indicator
• Consumer Prince Index (CPI)
• Adjusted Retail Sales
• Gross Domestic Product

How do I Get Started Trading Currency?

Have you been wanting to start in the Forex market for a while, but just haven't got around to it? There are so many different platforms out there for you to use, so it is hard to choose the right one. ForexCT offers you the latest in trading technology. Some of its main features include it being a single-interface, web-based, drag/drop and having advanced charts. There is also a guaranteed stop-loss, so the price/rate you enter is what you get. We also have scrapped all those commissions that other brokers charge you with. So what are you waiting for? It takes 1 minute to register, 5 seconds to log in and you can deposit via credit card instantly! To start trading now, simply CLICK HERE to register. If you have any questions or inquiries then please CONTACT US.

Best Business Books for 2007

Amazon.com has released a list of the best business books for 2007. These books give great insight into the business-world and corporate strategy. They may not necessarily be 'Forex' related but they are still a good read. Being that it is that time of year again, these may be a good Christmas present for someone looking to venture into the corporate world.

Check these books out

At the same time, check out ForexCT and start trading now!

Market Wrap 17/12/07

Dollar

What happened?
Dollar rallied across the board against all majors as data was much above expectations thus giving a perfect excuse to the market, who have been looking to lock some Dollar short profits ahead of the holidays. Consumer Price Inflation recorded its largest increase in two years while a weak Dollar is providing the much needed impetus to the U.S. manufacturing sector with Industrial Production came in much higher than expected thanks to overseas demand for cheap US goods.

What next?
In this scenario it will be very hard for the Fed to cut rates aggressively thus adding to the woes of the embattled average American home owner struggling to pay its mortgage, Subprime concerns are here to stay and with holidays upon us expect sharp volatile moves in the market. Dow’s gains from the previous day were wiped out in no time and expect further correction in the equity markets.

Euro

What happened?
Like other majors the Euro tracked general Dollar strength and has fallen by over 350 pips in the last few trading days recording its biggest one day decline in over 2 years. While the market has been eagerly awaiting a break out in this pair with many gunning for the 1.50 mark constant failure in achieving that figure increased the profit taking liquidation on longs. Euro – Zone inflation came in higher than expected which is likely to keep the ECB hawkish.

What next?
Data from the Euro-Zone should continue to outperform the U.S data and bottom pickers could come in at this level to send the Euro back into range trading mode. Today’s manufacturing and services PMI data should remain steady around current levels. Its cross against the Yen could see further liquidation which could weigh in on the Euro.

Yen

What happened?
Yen pared back its recent gains against the Dollar but strengthened against its crosses which were largely due to the losses in the equity markets and the corresponding carry trade liquidation. Yen was on the back foot all day due to the lower than expected result in the Q4 Tankan surveys which fell for the first time in more than 6 months. Corporate and Consumer sentiment is uncertain given the likelihood of a recession in the U.S. economy and its high correlation with the Japanese economy.

What next?
This morning’s Tertiary Industry index rose by 1.1% in line with expectations while business confidence should remain on the low side. But the Yen should continue to strengthen against high yielders with a fair chance of large scale liquidation in carry trades

Pound

What happened?
Pound crashed by 300 pips against the Greenback, sinking towards it lowest level in two years. Its decline was based on broad based Dollar strength rather than its own fundamentals. This morning’s data will not help its case either with the under pressure housing sector showing another decline in house prices as it recorded its sharpest monthly decline since the series began in January 2002. It was also stated that house prices will not rise in 2008

What next?
All eyes will be on Bank of England’s meeting minutes to be released this week, if the statement is not as dovish as expected it could lead to a relief rally in the Pound. A paper released by BoE stated that mortgage holders were not struggling to make repayments as the interest rate increases over the last few years have been in a gradual manner .

Aussie & Kiwi

What happened?
The Aussie and the Kiwi got sold off due to the general liquidation on carry trades however they have bounced well in early Asian trading. This morning’s data showed that the number of private housing starts rose which reinforces the view that the housing market down under is on much better footing than its counterparts in U.S. and U.K. Inflationary pressures in the New Zealand are likely to keep interest rates high well into the next year.

What next?
This is a busy data week for the commodity currencies, with the RBA policy meeting minutes likely to be hawkish in line with concerns of inflationary pressures. In New Zealand Business Confidence could inch lower on high interest rates and GDP could show a decline as well.

Weekly Country Focus: Australia

The Economy of Australia is a prosperous, Western-style market economy dominated by its services sector (68% of GDP), though the agricultural and mining sectors (29.9% of GDP combined) account for 65% of its exports. Rich in natural resources, Australia is a major exporter of agricultural products, particularly grains and wool, and minerals, including various metals, coal, and natural gas.

Australia occupies a continent close to the size of the contiguous United States. Service industries have expanded in recent decades at the expense of the manufacturing sector, which now accounts for just under 12 per cent of GDP.

Australia's emphasis on reforms is often cited as a key factor behind the continuing strength of the economy. In the 1980s, the Australian Labor Party, led by Prime Minister Bob Hawke and Treasurer Paul Keating, commenced the modernisation of the Australian economy by floating the Australian dollar in 1983, leading to full financial deregulation.

Current areas of concern to some economists include Australia's large current account deficit, the absence of a successful export-oriented manufacturing industry, a real estate bubble, and high levels of net foreign debt owed by the private sector.

Trade and economic performance

In the second half of the twentieth century, Australian trade shifted decisively away from Europe and North America to Japan and other East Asian markets.

Despite high global demand for Australian mineral commodities, export growth has remained flat in comparison to strong import growth. Even though Australia enjoys high commodity prices, economists have warned that structural change is needed in order to increase the size of manufacturing sector. The Australian economy has been performing nominally better than other economies of the OECD and has supported economic growth for 16 consecutive years. According to the Reserve Bank of Australia, Australian per capita GDP growth is higher than that of New Zealand, US, Canada and The Netherlands. The performance of the Australian economy is heavily dependent on US and Chinese economic growth.

Currency
Australian Dollar ($A or A$, AU$ or $AU, AUD)

GDP (PPP)
$645.3 billion (2006 est.)

GDP growth
3.8% (Q2 2007)

GDP per capita
$32,900 (2006 est.)

Inflation (CPI)
2.1% (Q2 2007)

Unemployment
4.3% (Q2 2007)

Main industries
Mining, industrial and transportation equipment, food processing, chemicals, steel