International Currency Risk

Protect your margin before markets move. FX can erase profit fast. Keep it simple with these seven steps: 1. See it ➞ Make a list of every FX cash flow. ➞ Currency, amount, date, in or out. 2. Hold currencies ➞ Open multi-currency accounts for top markets. ➞ Collect locally and convert when you choose. 3. Set a budget rate ➞ Pick one quarterly FX rate with a small range. ➞ If spot exceeds the range, reprice or hedge. 4. Use forwards ➞ Lock a portion of near-term cash flows. ➞ Match maturities to invoice dates. 5. Build natural hedges ➞ Offset inflows with outflows in the same currency. ➞ Pay suppliers or loans in the currency you sell. 6. Price and invoice smart ➞ Quote in your cost currency or add an FX clause. ➞ Shorten terms and offer early payment. 7. Net and time conversions ➞ Net payables and receivables by currency each week. ➞ Convert twice a week using limit orders. You cannot control financial markets, but you can manage FX exposures. How do you manage your FX risks? ------- ➕ Follow Jonathan Maharaj FCPA for finance‑leadership clarity. 🔄 Share this insight with a decision‑maker. 📰 Get deeper breakdowns in Financial Freedom, my free newsletter: https://lnkd.in/gYHdNYzj 📆 Ready to work together? Book your Clarity Session: https://lnkd.in/gyiqCWV2

FX & Interest Rate Risk Management Cheat Sheet! 2 critical financial risks treasury teams manage are FX risk and Interest Rate Risk (IRR). If not properly managed, both can erode margins, distort earnings, and create instability in cashflow planning. Learn more: https://lnkd.in/gwSMHnRG Here is a concise framework you can use: 1. Foreign Exchange (FX) Risk Key FX Risk Types • Transactional FX Risk – Exposure from future contractual cashflows such as imports, exports, accounts receivable, and accounts payable. Impact: Margin volatility and cashflow uncertainty. • Translational FX Risk – FX impact when consolidating financial statements of foreign subsidiaries. Impact: Earnings volatility in the balance sheet and income statement. • Economic FX Risk – Long-term impact of exchange rate movements on competitiveness and pricing strategy. Impact: Potential market share erosion. Measurement & Monitoring You can track exposure using tools such as: • Net Open Position (NOP) – aggregate currency mismatch across inflows and outflows. • FX Sensitivity Analysis – EBITDA impact from ±5–10% currency movements. • Scenario Modeling – base, worst, and best exchange rate scenarios. Operational Mitigation (Natural Hedging) Before using derivatives, you can reduce exposure through: • Currency matching of receivables and payables • FX budget rates for pricing and procurement planning • Local currency settlement strategies • Procurement timing adjustments based on FX trend Financial Hedging Instruments When natural hedges are insufficient, you may use: • FX Forwards – lock in exchange rates for future obligations • FX Options – downside protection with upside participation • Cross-Currency Swaps – exchanging one currency for another Strong governance is essential, including hedge ratio policies, counterparty monitoring, hedge effectiveness testing, and board-approved FX policies. 2. Interest Rate Risk (IRR) Interest rate volatility affects borrowing costs and investment returns. Key IRR Types • Repricing Risk – mismatch between asset and liability maturities • Yield Curve Risk – changes in short- vs long-term rates affecting refinancing costs • Basis Risk – mismatch between benchmark indices (e.g., SOFR vs Prime) • Optionality Risk – early repayment or prepayment risk affecting expected cashflows Measurement Tools Treasury teams typically use: • Interest Rate Gap Analysis • Duration Analysis • Stress testing using ±100–200 bps scenarios IRR Hedging Instruments Common tools include: • Interest Rate Swaps – convert floating debt into fixed rates • Interest Rate Caps – set maximum borrowing cost • Interest Rate Floors – protect minimum investment returns • Collars – combine cap and floor for cost-controlled protection Treasury is really about protecting enterprise value from financial market volatility while maintaining stable margins and predictable cashflows. 📌 Repost & Share!

Currency fluctuations cost us $500K in ARR (-2%) in November. Here's how: For a long time, customers could only pay in USD via credit card at lemlist. But, 9 months ago, we enabled payments in EUR & GBP to make things easier for international customers. To keep things simple, we used a 1:1 conversion rate: 1$ = 1€ = 1£. Fast forward to today: 1/3rd of our revenue — $9M — is billed in EUR. So when the EUR dropped 6% against the USD, our ARR dropped by 6% * 33% = -2%. The interesting part? Our business actually grew in November. But the reported ARR took a hit due to currency shifts — something totally outside our control. It’s a reminder that as you scale, metrics aren’t just about performance. They can be shaped by external forces like currency rates, inflation, and broader macroeconomic trends. Back in my M&A days, we always adjusted for constant FX rates to see a business’s real growth. It stripped out the noise and let us focus on what actually mattered. Hope you'll find this valuable 🙏

𝗧𝗵𝗲 𝗠𝗶𝗻𝗶𝗺𝘂𝗺 𝗩𝗮𝗿𝗶𝗮𝗻𝗰𝗲 𝗛𝗲𝗱𝗴𝗲 𝗶𝗻 𝗦𝗶𝗺𝗽𝗹𝗲 𝗧𝗲𝗿𝗺𝘀 𝗖𝗼𝗻𝘁𝗲𝘅𝘁: Long a foreign asset = long the foreign currency When a domestic investor buys an asset denominated in a foreign currency (FC), they are: • Long the asset (e.g., a Japanese bond) • Long the foreign currency (e.g., JPY) 𝗘𝘅𝗮𝗺𝗽𝗹𝗲: a U.S. investor buying a German bond (in EUR) • They are long the EUR bond • Therefore, long EUR / short USD This exposes them to two risks: 1. The market risk of the asset (interest rates, spread, duration, etc.) 2. Currency risk (EUR/USD fluctuations) 𝗢𝗯𝗷𝗲𝗰𝘁𝗶𝘃𝗲: 𝗛𝗲𝗱𝗴𝗲 𝘁𝗵𝗲 𝗰𝘂𝗿𝗿𝗲𝗻𝗰𝘆 𝗿𝗶𝘀𝗸 𝘃𝗶𝗮 𝗠𝗩𝗛𝗥 The Minimum-Variance Hedge Ratio (MVHR) is used to determine the optimal size of the currency hedge (often with FX forwards or futures) in order to minimize the variance of the portfolio expressed in domestic currency. 𝗘𝗺𝗽𝗶𝗿𝗶𝗰𝗮𝗹 𝗲𝘀𝘁𝗶𝗺𝗮𝘁𝗶𝗼𝗻 𝘃𝗶𝗮 𝗹𝗶𝗻𝗲𝗮𝗿 𝗿𝗲𝗴𝗿𝗲𝘀𝘀𝗶𝗼𝗻 MVHR can be estimated by performing a linear regression of the portfolio return (in local currency) on the foreign currency return: 𝗥𝗲𝗴𝗿𝗲𝘀𝘀𝗶𝗼𝗻 𝗳𝗼𝗿𝗺: R_port = alpha + beta × R_FX + error Where: • R_port = return of the foreign portfolio expressed in the local currency • R_FX = return of the foreign currency against the local currency • beta = sensitivity coefficient of the portfolio to FX changes (this is the estimated MVHR) • alpha = constant (not used for the hedge) • error = random noise 𝗜𝗻𝘁𝗲𝗿𝗽𝗿𝗲𝘁𝗮𝘁𝗶𝗼𝗻 𝗼𝗳 𝗯𝗲𝘁𝗮: • beta = 1 → hedge 100% of the FX exposure • beta > 1 → hedge more than 100% (over-hedge) • beta < 1 → hedge less (under-hedge) Analytical formula (derived from beta): Beta = Cov(R_FC, R_FX) / Var(R_FX)   = Corr(R_FC, R_FX) × (σ_FC / σ_FX) Where: • Corr(R_FC, R_FX) = correlation between the asset return and the currency return • σ_FC = volatility of the asset return • σ_FX = volatility of the currency return This analytical “formula” is simply a rewrite of the regression beta. It relies on strong statistical assumptions (stationarity, homoscedasticity, etc.) which are often violated in practice. 𝗪𝗵𝘆 𝗳𝗶𝘅𝗲𝗱-𝗶𝗻𝗰𝗼𝗺𝗲 𝗽𝗿𝗼𝗱𝘂𝗰𝘁𝘀 𝗼𝗳𝘁𝗲𝗻 𝗿𝗲𝗾𝘂𝗶𝗿𝗲 𝗺𝗮𝘅𝗶𝗺𝘂𝗺 𝗵𝗲𝗱𝗴𝗲 (𝗠𝗩𝗛𝗥 > 𝟭) Fixed-income assets (bonds) often have a negative correlation between their return and the foreign currency: 𝗘𝘅𝗽𝗹𝗮𝗻𝗮𝘁𝗶𝗼𝗻: • When interest rates rise in the foreign country: • Bond prices fall → yields rise • The currency may depreciate due to negative economic outlooks • Result: FC return ↑, FC currency ↓ → negative correlation • This increases the variance of the portfolio • To reduce this variance, the statistical model recommends a higher hedge 𝗘𝘅𝗮𝗺𝗽𝗹𝗲: Suppose the regression yields: R_port = 0.001 + 1.25 × R_FX + error Here, MVHR = 1.25 The investor should hedge 125% of the FX exposure.

Foreign Exchange Risk: Mitigating Uncertainties in Treasury Management Foreign exchange (FX) risk presents a unique set of challenges within the treasury operations of banks, especially those engaged in international transactions. As currency values fluctuate, they can significantly impact the bank's earnings and capital. Understanding and mitigating this risk is essential for maintaining the financial health and stability of an institution operating on a global scale. Treasury departments employ various strategies to hedge against FX risk. One common approach is the use of forward contracts, which allow banks to lock in exchange rates for future transactions, thereby neutralising the effect of adverse currency movements. By securing a predetermined rate, banks can plan their financial strategies with greater certainty and reduce the risk of exchange rate volatility affecting their profitability. Another tool at the disposal of treasuries is currency options. These financial derivatives provide banks with the right, but not the obligation, to buy or sell a specific amount of foreign currency at a predetermined price before a certain date. Options offer flexibility and protection against unfavourable exchange rate movements while allowing banks to benefit from favourable shifts. Natural hedging is yet another technique employed to manage FX risk. This involves offsetting exposure in one currency with exposure in the same or a correlated currency. By structuring operations or assets and liabilities in a manner that naturally offsets currency risks, banks can reduce their need for external hedging instruments, thereby lowering costs and complexity. The management of FX risk is not solely about protecting against potential losses; it is also about identifying and seizing opportunities that currency fluctuations may present. However, it is crucial that banks approach this with a conservative strategy, recognising the volatile nature of the forex market. A well-thought-out approach, combining accurate forecasting and diversified hedging techniques, can help banks navigate the complexities of currency exchange. The importance of FX risk management extends beyond the treasury department; it is a critical component of a bank's overall risk management strategy. A realistic and informed approach to foreign exchange can help a bank maintain financial stability, meet regulatory requirements, and support its international operations effectively. By delving into the intricacies of FX risk and its mitigation strategies, we can gain a deeper understanding of the global financial landscape. This knowledge is beneficial, ensuring that banks remain robust and resilient in the face of currency market volatility.

Lots of AI talk at @ACT this week, and a lot of the buzz was about agents. But the more you give to an agent to do, the more scope it has for misunderstanding and hallucination, so what do you need to know? Here’s some of the thinking behind one of our own AI agents, the FX Hedge Advisor, which meets SOX standards. Specifically, the key things we knew had to be right before we could trust it –as treasurers ourselves. 1. Hedge the right number, or do not bother. Build validations in for completeness, accuracy and cut off amongst others. Before anything else, the tool has to net per currency, filter functional currency entity by entity, handle intercompany properly, and value against today's market. If that picture is not clean and current, every recommendation downstream is built on sand. 2. Ask the question that does not get asked. Most teams default to a forward because working through forwards, layered forwards, collars, options, natural hedges and swaps, per currency, against the company's own policy, takes time no one has. The tool's job is to do that comparison – properly, every time – so the default stops winning by attrition. 3. ‘Best’ has to mean what the treasurer's policy says is best. Not what the model thinks. The treasurer sets the weights in advance: how much the business values P&L certainty, carry cost, working capital impact, permitted instruments, tenor limits, hedge accounting treatment. The tool scores against those priorities. It does not invent them. 4. Client data should never leave the client. Our preferred deployment is inside the client's own environment, using their approved stack and model of choice. The aim is not to move sensitive treasury data into a shared external setup, but to work with the controls the client already has. 5. Check the overall liquidity impact leaves sufficient available liquidity vs policy. Using swaps that roll every month may be cheapest but if a 10% currency shift leaves you short of liquidity, the strategy is the wrong one. 6. Every number has to be defensible. No black box. The maths is shown, the policy checks are explicit, the reasons a structure is rejected are stated. An analyst can walk the treasurer through it line by line, and the treasurer can take the same logic to the audit committee. 7. Compliance built in, not bolted on. Timestamped outputs, version control, operator and reviewer sign-off, a clear audit trail of what was recommended and why. The same discipline supports IFRS 9 hedge accounting analysis, which can be added on and links naturally to the cash flow forecasting work we do elsewhere (current projects underway across clients in Ireland, Switzerland, and the UK). Currency swaps and layered strategies were the gap last time I posted (link in the comments). Both are now in. Happy to show anyone who would find it useful. And would love to hear your thoughts on other functionalities you’d like us to work on.

Introducing TCX Insights: Currency risk management and debt sustainability - How currency crises reshape fiscal policy and why indexing to local currency can help. This week at the #Africa Investment Forum in Rabat, we will participate in discussions around mobilizing capital for Africa's development. To do so, we need to address FX risk. Today we launch #TCXInsights – a series of thought leadership pieces designed to bring clarity, evidence, and practical solutions to one of the most persistent challenges facing emerging and frontier markets: currency risk. At TCX we are committed to building a platform where we can #Exchange knowledge, information, research, and build a collaborative platform to mobilize local currency solution. Our first TCX Insights publication: Risk Management and Debt Sustainability – where we example how currency crises reshape fiscal policy and why indexing to local currency can help mitigate the effects. The paper outlines three core messages: 1. Currency risk limits fiscal capacity. Even a single depreciation can inflate debt costs, force emergency adjustments, and derail development goals. Over 80% of external financing in many low-income countries is still in hard currency. 2. The impacts are real — and avoidable. Historical and recent crises from Mexico to Sri Lanka show how currency mismatches fuel debt distress, downgrades, and procyclical fiscal tightening. Local-currency indexation absorbs shocks before they hit budgets. 3. Strategic currency management works. Jamaica, Paraguay, Indonesia, Uzbekistan, and Côte d’Ivoire – successful stories show how swaps, synthetic structures, and innovative bond structures improve predictability, deepen markets, and boost creditworthiness. Read the full paper and stay tuned for more updates as we launch this platform. #emergingmarkets #developmentfinance #innovation #capitalmarkets

An airline made $75 million flying passengers. It lost $171 million to the exchange rate. In 2023, Kenya Airways reported an operating profit of roughly $75 million. Foreign exchange losses of $171 million on monetary items, loans, and leases turned it into a $162 million loss before tax. The airline made money operationally. Currency destroyed the bottom line. Everyone talks about fuel price volatility. Currency fluctuations don't get the same attention. They should. 55 to 60% of airline costs are USD-denominated. Only 50 to 55% of revenue is, and that is a global aggregate. US carriers earn heavily in USD, narrowing their gap. For most non-US carriers, the currency deficit is structural. A 1% move in the USD shifts global airline profits by roughly 1%. On a $41 billion industry profit, that is not a rounding error. The risk enters when fares are published in foreign currencies, when tickets are sold and rates have moved, through BSP, CASS, and PSP settlement delays, and again when funds are finally repatriated. It touches pricing, route economics, fleet financing, and the actual yield the airline captures. Every airline executive should understand how. Not just finance. This reference guide maps airline FX risk in a single view: the six sources of currency exposure, the revenue flow showing where risk enters, and the three structural positions that determine how sensitive an airline is to currency movements. A weaker dollar is widely reported as good news for airlines. Is it? And how will it impact the 2026 results? Like this post: 💾 Save for quick reference 🔄 Share with your network and spread the knowledge #Airlines #AirlineEconomics #AirlineFinance #AviationConsulting #Air52Insights

If You Run a Business in Botswana, Your FX Strategy Needs an Update Botswana’s foreign exchange landscape is changing — and many businesses are still operating as if nothing has shifted. Here’s what smart businesses should be doing now 👇🏽 1.Audit your FX exposure: Ask one hard question: Where does my money come from, and in what currency? If your costs are in foreign currency but revenues are mostly in pula, you are exposed. Awareness is step one. 2. Reprice with intention, not panic: A weaker pula doesn’t mean automatic price hikes. It means strategic pricing — segmenting customers, renegotiating supplier terms, and protecting margins intelligently. 3. Hold and manage FX more deliberately: If you earn foreign currency, treat it as a strategic asset, not just something to convert immediately. Better FX timing and planning can materially improve cash flow. 4. Reduce silent import dependency: Even service businesses carry hidden FX risk — software subscriptions, tools, equipment, logistics. Local substitutes and renegotiated contracts matter more than ever. 5. Bring FX into leadership conversations FX is no longer a “finance-only” topic. It now affects growth, pricing, competitiveness, and survival. 💡 In this environment, businesses that manage FX intentionally will outperform those that ignore it.

FX swaps. The instrument every treasurer uses and almost nobody fully prices. An FX swap is two legs (the near leg and the far leg). You sell a currency at spot today and buy it back at a predetermined forward rate on a fixed date. Simple in execution. Not simple in risk. Five things you need to understand before you roll another FX swap book. 1. What it actually is Two simultaneous transactions. Near leg: exchange currencies at today's spot rate. Far leg: reverse the exchange at a pre-agreed forward rate. No net FX exposure on the principal – both rates are locked at inception. What changes is the cost of carry embedded in those forward points. 2. How it is priced Forward points are driven by the interest rate differential between the two currencies, not by anyone's view on where spot is going. If AUD rates are higher than USD rates, AUD trades at a forward discount. You pay that differential to hold the hedge. This is covered interest parity. It is not negotiable. What is negotiable is the bid/offer spread, and that matters more than most treasuries realise. 3. Roll risk: the exposure that builds slowly and continuously Most FX swaps are short-dated – one week to three months. That means the hedge is not a set-and-forget. It is a rolling programme. Each time you roll, you reprice at whatever the forward points are on that day. If rate differentials have moved, your hedging cost has moved. If the market is stressed, your cost has moved sharply. The roll cliff – when a large notional comes due in a dysfunctional market –is where FX swap programmes genuinely fail. 4. Collateral: not as simple as it looks FX swaps sit under ISDA agreements with CSA margining. Variation margin moves with MTM. For cleared trades, initial margin adds a standing liquidity drag. The rehypothecation of posted collateral introduces counterparty credit exposure that sits quietly in the background until it doesn't. Short tenor does not mean zero operational complexity. 5. Where it breaks Dollar shortage events – GFC, March 2020 – push forward points to levels that make hedging economically irrational. Bank counterparties pull lines precisely when notional volumes are highest and alternatives are fewest. A programme built on the assumption of continuous market access is not a hedged programme. It is a programme that works until it doesn't. FX swaps are the right tool for managing short-dated currency exposure. The structure is sound. The risk is in treating the roll as automatic and the cost as fixed. parabellumadvisors.com