Payments & FX
Don’t Bottom Out your Bottom Line: Get Smart about Managing FX
For many businesses global activities increasingly contribute to corporate earnings growth.
S&P 100 companies generate approximately 60% of their earnings from outside of their base operating currency.1 But currency volatility creates an ever looming threat that can destroy value fast. One S&P 100 MNC lost 9 percent of full-year earnings per share in 2015. Another saw $17 billion in sales evaporate.2 If you don’t address currency risk as you expand into new growth markets, the problem will only intensify.
No matter how sophisticated you are, you might not see it coming. Out of 133 global corporations, 56% said that lack of visibility and reliability of FX forecasts is the biggest challenge in managing FX risk.3 Volatility impedes predictability.
CONSTANT CHANGE REQUIRES PERMANENT READINESS
Market conditions are always evolving. Corporate treasury must be ready to respond to risks that could destroy value and opportunities to enhance performance. How can you be flexible if your supporting banking structures are rigid? A lack of flexibility is often layered in:
Bank account structures that are often hardcoded. Many accounts around the world hold pockets of cash in non-functional currencies, spread across banks.
Liquidity management being less mobile as a result of account structure. Viewing and managing liquidity across jurisdictions to support payment flows is complex. Idle cash sits in non-functional currencies, or, if centralized, then there is a clunky, often manual process for moving liquidity at the right time to support payments and optimize cash.
Currency exposures that are challenging to cohesively view, aggregate and manage. Hedging is often a separate activity from the flow of business that created the exposures.
The resulting inflexibility exposes companies to risks while limiting the possible upside amid shifting market conditions and emerging opportunities.
ACHIEVING FLEXIBILITY IN THREE STEPS
The good news is that the avenue to FX flexibility is through the above same three layers. Whether your global presence includes manufacturing, sales and distribution, or a blend of both, you can identify a finite number of choices for achieving change by assessing your business activities and transaction flows.
Accomplishing this task requires the following series of steps:
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RETHINK YOUR FX DESK AND MULTI-DEALER PLATFORM
With an automated, self-regulating solution in place, it doesn’t make sense to revert to a labor-intensive approach for managing residual FX or cash investments. Underlying the quest for the best rates is the hidden cost of employing a team of people who are engaged in placing multiple calls to compare rates before then executing FX trades. It is more beneficial economically to leverage the flexible, automated system you have built and extend it to these activities to reduce these costs.
Additionally, you can segregate your long-term strategic currency hedges and investments for handling via your multi-dealer platform. This efficiently minimizes the costs of running a manual investment machine.
Risk and opportunity: interest rates
Evolving rate environments exemplify the need for flexibility. With global variances between negative, flat and rising rates liquidity must be visible and mobile across currencies to the extent possible to minimize costs and risks while optimizing cash. Liquidity mobilization for investment can embed automated FX and be directed based on your liquidity profile including yield benchmarks.
SEPARATING LAYERS TO BRING THINGS TOGETHER
As you sculpt your infrastructure, you must evaluate potential providers to determine how well they can address each layer and bring together the three composite parts for achieving FX flexibility. Tackling flexibility layer by layer allows you to manage liquidity, payments and FX cohesively. Simplification takes work as it requires you to unwind hardcoding of account structures. However, the end result will improve your responsiveness to business requirements in an ever-changing corporate environment.
For more information, contact your J.P. Morgan Treasury Representative.
J.P. Morgan is the marketing name for the Treasury Services business of JPMorgan Chase Bank, N.A. and its affiliates worldwide
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