Creating an FX hedging program
Summary
A publicly traded US-based company had recently acquired its largest supplier and wanted to proactively structure the transfer pricing agreements to facilitate centralized balance-sheet and cash-flow hedging.
Company goals
- Identify and quantify the new sources, duration and magnitude of risk stemming from the newly acquired manufacturing subsidiary
- Incorporate foreign-exchange considerations from the onset of any transfer pricing agreements between the manufacturing subsidiary and other entities
- Develop flexible, leading-practice FX risk strategies, and controls and accounting documentation associated with the use of financial derivatives
Key activities
- Partnered with Treasury, Procurement, and FP&A teams to aggregate all forecasted non-USD cash-flows and remeasured monetary assets and liabilities
- Worked with Tax and Accounting teams to crystalize specific timing patterns and jurisdictional requirements for intercompany flows between entities
- Simulated the parent entity’s risk to FX G/(L), EBITDA, and CAPEX stemming from the newly acquired entity within the proposed intercompany transfer agreement
Results
- Developed a tiered implementation approach that the company deployed to immediately address short-term balance sheet risk, while monitoring growth-based triggers to identify when EBITDA / CAPEX offsets no longer existed
- Provided outsourced strategy, accounting, and capital market resources which enabled the company to implement a best-in-class risk management program with no impact on internal resources
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Disclaimers
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.
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