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Case studies

Analysis of a company's hedging result

Situation

  • Our client is an international group with high sensitivity to foreign exchange risk.
  • The fluctuations in foreign currencies in 2008 due to the financial crisis led to high volatility in foreign exchange income; it shows very significant losses.
  • The Group's cash is under the control of a small team that does not have the time and tools necessary to analyse these impacts in detail. Are they cyclical or structural? Are there any alternative hedging methods that would reduce the volatility of this foreign exchange income?

Our role

  • Under the authority of the Financial Director and the Treasurer, we identify the main causes of changes in foreign exchange income by pointing out the impacts resulting from:
    • Exceptional fluctuations in exchange rates;
    • Non-recurring operations of the Group (acquisitions, debt);
    • Exchange controls on certain currencies;
    • The Group's regular hedging policy.
  • We identify the controls put into place by the Treasury and test the hedging instrument value calculations.
  • We perform a comparative analysis with other international groups of the hedging processes for similar activities and propose alternative hedging processes, highlighting their impacts on exchange income, the balance sheet, and the reporting processes of the Group.

Outcome

  • The financial team has a clear analysis of the group’s foreign exchange income and prepares its financial reports accordingly.
  • The audit of currency flows is the subject of a report submitted to the audit committee. Additional verifications are put into place following our analyses.
  • Thinking begins about ways to change the exchange rate policy. Alternative hedging strategies are proposed to the Group’s executive committee.

Value added for our client

  • Our ability to mobilise a team of specialists in foreign exchange issues in a short time.
  • The competence of the team also depends on its ability to translate raw accounting data into economic terms while controlling the analysis of the hedging processes.
  • Our timeliness: in one month, the financial team has our findings and can propose an action plan to the Group’s management team.