the underlying concepts.A transaction exposure is one which is readily identiﬁable in thecurrency in which it arises. For example, if a company has made a saleof goods for USD 100 and an invoice has been issued, there is clearlya transaction exposure to USD 100 (although it could be argued thatthe exposure is not quite deﬁnite, since the customer might defaulton payment). Similarly, sales which have been made but not invoiced,sales which are about to be made, sales which are forecast etc. areall exposures which are identiﬁable, but with decreasing levels ofcertainty. Once the exposure is uncertain, or not genuinely in thecurrency in which the transaction is settled, it is usually called aneconomic exposure rather than a transaction exposure.Consider the following further Examples of economic exposure:
Example 4A Norwegian company makes a sales agreement for the year,with a UK customer, to sell at a ﬁxed euro price. It agrees,however, to invoice the customer in sterling. There will be aseries of transactions in sterling, with the transaction exposuresarising in sterling until settlement of any invoices already issued,but economic exposures in euros for subsequent sales.The company could sell sterling forward to cover those invoiceswhich have already been issued. For the exposure arising fromthe anticipated income over the rest of the year, it sells eurosforward instead. As each sterling invoice is issued, it convertsthe forward euro cover to sterling cover by buying back the eurosforward against sterling.
Example 5The product sold in Example 4 is oil, which is priced internationally in dollars. Suppose that the sales agreement is reviewed after6 months, and the dollar has fallen sharply. The UK customerwill be in a strong position to renegotiate the price downwards.The economic exposure therefore becomes a dollar one ratherthan a euro one after some months ahead.
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The same company might sell sterling forward to cover invoicesissued (as above), sell euros forward to cover sales beyond that(again as above), but only up to 6 months, and sell dollarsforward beyond that. The dollar cover would need to be convertedto euro cover after a new price ﬁxing, and to sterling cover afterinvoice.
Example 6The product sold in Example 4 is one for which the majorcompetitor is Japanese. Suppose that the yen falls sharply sothat competing products become much cheaper. Again, the UKcustomer might be in a position to renegotiate the price, so thatthere is a competitive exposure to yen some months ahead.Again, the company could sell yen forward beyond a certainperiod, and maintain a rolling hedge. Alternatively, it couldmaintain some of its debt in yen. The difﬁculty of course isknowing how much to sell or borrow. Another possibility is tobuy long-term out-of-the-money yen put options, so that anysigniﬁcant yen fall can be offset.
Example 7The Japanese competitor in the previous example might sourceall his products directly from Australia, so that the competitiveexposure is in fact not yen but Australian dollars.Forward sales, debt, or long-term Australian dollar put optionswould similarly provide some protection.
Example 8A UK company sells consumer products to Sweden in euros.There is a 10% devaluation of the Swedish krona. Although thereis no direct competition, Swedish consumers are less willingthan before to buy the goods at the same price. The UK companytherefore needs to reduce the euro price to maintain sales. Thisis therefore an economic exposure to the Swedish krona.Again, sales of kronor beyond a certain period, or kronadebt, might be effective. Another possibility is to change thecurrency of invoice to kronor, in order to make the transaction
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exposures and economic exposures coincide better. This mightnot, however, be an attractive proposition. It might be preferableto live with the economic krona exposure unhedged, and takeadvantage of the time lags between changes in the krona andchanges in the euro price which the company is able to achieve.
Example 9A UK hi-ﬁ manufacturer making equipment sourced entirelyfrom UK parts and sold entirely to the UK market has a yenexposure, because a weak yen gives his Japanese competitors inthe UK market an advantage.Such effects are generally very difﬁcult to quantify, particularly asthey are likely to involve several currencies. In general, the questionto be asked is: At each point in the future, given various changesin exchange rates internationally, what are the net effects in termsof my home currency? Ideally, the company needs to measure thecorrelation of changes in particular exchange rates with changes inproﬁt as measured in the home currency.Suppose, for example, that a US company sells a product to theUK in sterling but suspects that, over time, the sales price which itachieves is linked to the euro because its main competitors are in theeuro-zone rather than the UK or the USA. An approach would be tocompare a graph of the sterling price over time with a graph of thesame price converted to euros. If the suspicion is correct, the secondgraph might show a more regular trend than the ﬁrst. If this is so,the company should perhaps be protecting against a euro risk – withan appropriate time lag to allow for price adjustments – rather thana sterling risk.Such a task is immensely complicated and in practice there arerarely sufﬁcient data for a complete analysis, particularly as continualchanges in economic conditions and many other external factors willdistort the analysis. The company must therefore use its knowledgeand experience of the economics of its own business as a startingpoint in this analysis.Hedging economic exposuresTo some extent, economic exposures are hedged in exactly the sameway as other exposures, as outlined in the examples above. A morefundamental approach involves longer-term planning. The exposuresin Examples 6 and 7, as well as the UK hi-ﬁ manufacturer’s exposure
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in Example 9, might be reduced best by changing the company’s ownsourcing to some extent. If the company in Example 7 also sourcessome materials from Australia, for example, this exposure is reduced.Conversely, the consumer products company in Example 8 might dowell to seek to diversify his sales to euro countries as well.
Establishing a policyIt is a fact of life that doing business might give rise to currencyrisks – whether these are clearly apparent as in the case of transaction and translation exposures, or are more obscure, as in thecase of economic exposure. These risks can be approached in twoways – they can be managed or they can be ignored. A treasurer canbe criticized for ignoring a risk that his company faces, but shouldnot be criticized for managing the risk. Often, although certainly notalways, this implies taking action on the best available informationregarding currency movements.Over the years, companies involved in hedging currency exposureshave increasingly realized the advantages of having at least someformal guidelines for managing these exposures. The more such apolicy is written down and formally approved by the company’s topmanagement, the better.The importance of this can be seen from both ends of the operation:ﬁrstly, no one can doubt that the currency and interest rate marketscan be extremely volatile from time to time. Such movements musttherefore be of vital importance to the top management of manycompanies. The ﬁnancial markets can be complex, however, and theinstruments used to protect against them sometimes more so. It istherefore an essential exercise for the company board to be forcedto consider the intricacies of such matters, even if only occasionally.Being presented with a written policy document to read, understandand authorize concentrates the mind on this. There have of coursebeen notable occasions where following a prudent formal policy mightwell have avoided signiﬁcant embarrassment.Secondly, the person responsible for managing the risks day-today is also in a far more satisfactory position if he knows preciselythe guidelines within which to work. This does not mean that theguidelines need to be oppressively restrictive, as the policy might quitedeliberately give considerable ﬂexibility to the treasury department.The point is that as long as the treasurer acts within the policy, heshould not feel his job is in jeopardy.What subjects then should such a policy document speciﬁcallyinclude?
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What should be managed?The ﬁrst policy decision concerns which exposures it is possible, ordesirable, to manage. Does the company decide that only transactionexposures should be managed – and if so, how far forward? – orshould the policy also cover economic exposures? Should the balancesheet be protected against the effect of currency ﬂuctuations? Theexact answers to these questions must vary from company tocompany, according to both differing circumstances and differingattitudes. The company’s preference might, for example, be not tomanage balance sheet risks in the sense of taking short-term ormedium-term hedges to protect the position at the next ﬁnancialyear-end. This is because such a hedge might, if exchange rates gothe other way, result at some point in a cash loss which is offset by anon-cash balance sheet gain. This is, however, a controversial issue,and many companies maintain the opposite view – that they mustprotect against relatively short-term balance sheet ﬂuctuations, albeitat a possible cost, because of shareholder concern or the perceptionof the banks lending to the company.Economic exposures are something which in theory all companiesshould consider managing. These are often very uncertain however,so that even with the best of intentions, useful management might bedifﬁcult.
Should the company speculate?The next important point to consider is the company’s objectives.There is no single answer to the question ‘‘What should the treasurerbe trying to achieve?’’ because the answer will vary from company tocompany, and depend on the nature of the business and the attitudeto risk of the company’s management. However, the broad distinctioncan be made that, unlike a bank, a company’s currency managementis generally directed towards protecting the company’s non-ﬁnancialbusiness rather than towards trading for ﬁnancial speculative proﬁt.Speciﬁcally this will lead, at least as far as transaction exposuresare concerned, to a consideration of particular exchange rate levelswhich need to be protected. This is considered further in ‘Settingcommercial target rates’ below.A key question is therefore whether a company whose business isessentially non-ﬁnancial should speculate or not. The immediate gutreaction to this is ‘‘No!’’ However, it begs a further question: ‘‘What isspeculation?’’A relatively straightforward situation arises when a company hasboth payables and receivables in the same foreign currency. In thiscase, covering the payables but not the receivables – or vice versa – is
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probably speculative. The safest approach is almost certainly toconsider the net position.Extending this idea, it might be safest also to consider netting twodifferent foreign currencies where these are closely related. Suppose,for example, that a sterling-based company has euro payables andDanish krone receivables, and that it hedges the payables because itis worried that the euro might strengthen. If in fact the euro weakensagainst sterling instead of strengthening, then the Danish kroneis also likely to weaken against sterling – because there is a closermarket relationship between the euro and the krone than betweeneither of them and sterling. The result of the one-sided hedge mighttherefore be to open up a risk which did not exist before to a signiﬁcantextent, or at least to increase the risk rather than decrease it. Beforeany cover was taken, there was a net long krone/short euro exposure,which is generally not very volatile. After the cover, however, there isa net long krone/short sterling exposure, which is more volatile. Thepurchase of euros has therefore increased risk rather than reducedit. If we consider speculation to be anything which increases thevulnerability of the company to currency movements, then what wasintended as a hedge can possibly be seen to be speculation instead.There is no perfect answer, but taking the wider view and looking atcurrency relationships is important.
SuggestionSpeculation is action which increases vulnerability and hedgingis action which reduces it.This idea can be extended to parallel hedging – although manycompanies would consider this to be unacceptable. Suppose thatthe company has only euro payables, and has no exposure at all tothe Danish krone. Is it acceptable to hedge the short euro positionby buying forward Danish kroner against sterling, instead of buyingeuros against sterling? The original position was short euros againststerling, and the position after taking cover is short euros againstkroner. If it can be argued that the resulting position is less riskythan the original position, then can the action be considered asjustiﬁable hedging?Another question is whether it is it acceptable to reverse foreignexchange cover which has already been taken. In one sense, this isusually increasing vulnerability to risk by reopening an exposure. Ifthe cover has proved proﬁtable, however, and the currency marketoutlook has changed, is it sensible not to take the proﬁt?
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The next suggestion is even more controversial. Despite the hazards,it is not necessarily wrong for a company to speculate. In the sameway that a company might deliberately seek to make a proﬁt throughtwo quite different lines of business, it might also deliberately seek tomake a proﬁt through ﬁnancial dealings as well as, say, manufacturing. (In saying this, we are of course deliberately ignoringany constraints imposed by national exchange controls.) If this isaccepted, there is, however, an important caveat:
It is essential that the board of the company must understandand accept clearly what the company’s treasury department isdoing and that – just as with manufacturing in bad times – itmight make losses rather than proﬁts.
It is also essential that the policy document circumscribes preciselythe limits of the losses which may be made, the way in which proﬁtsand losses will be measured, the instruments which may be used,and the extent to which speciﬁc personnel may be involved. Problemsare generally not so much when losses arise, but when losses comeas a surprise to those at the top who should have been well preparedfor the possibility.Yet another example can arise even if the company believes itis carefully hedging everything. Suppose that the company importsheavily from Sweden and that it hedges all its Swedish krona payablesfor the next year. It can relax in the knowledge that it has avoidedany speculative view on the krona for 12 months. The krona thendevalues and the company’s major competitor has hedged nothing.That competitor can now steal a market advantage by cutting its salesprice, because its costs are lower. So was our company’s forwardpurchase of kronor in fact good hedging or speculative?
How much cover?Assuming that the pattern of transaction exposures can be predicted,the next question must be: Over what future period is it in factdesirable to manage exposures?For example, if the exchange rates currently available in the marketare used to calculate selling prices, exactly on the basis of a certainproﬁt margin, then a completely risk-averse organization might wishto hedge 100% of receivables at the time those prices are ﬁxed. Thiswould ensure that the calculated proﬁt margin is preserved.However, if foreign currency prices of sales are set on anotherbasis – for example, according to what the market will bear – the
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rationale for automatic hedging at the time of pricing disappears. Inthis case, covering exposures either before prices or sales volumes areknown, or some time afterwards, does not create any new difﬁcultiesin the decision-making of setting prices and making sales. Rather,hedging beforehand might enable sales to be made with greaterknowledge regarding proﬁtability.There is therefore no universal rule for automatically hedging aspeciﬁc ﬁxed amount of payables or receivables (all, none, or part) atthe time when sales are made. Rather, assuming continuing businessfor the foreseeable future, the extent to which currencies are hedgedat any time could reﬂect:• The extent to which management is conﬁdent that the currentexchange rates are the best• The extent to which management is conﬁdent that exposures havebeen forecast correctly• The risk that exchange rates will move away from an importantcommercial target level (see below) for the companyWithin these conﬁdence levels, exposures can be hedged from anytime between the time horizon of long-term forecasts, and the timewhen the cashﬂow eventually occurs. This is not to say that anyparticular exposure should necessarily be hedged, but that consideration should be given to hedging it as soon as it can be identiﬁed.This again raises the issue of economic exposure: is a dollar inﬂowforecast to arise in one year’s time really a dollar exposure, or aneconomic exposure in another currency? The proportion of covertaken on any particular exposure at any time should therefore generally be ﬂexible and should depend on both the time horizon and theview of likely currency movements. For example, a company mightdecide that up to the time horizon of booked exposures, it is reasonable to take cover between 0% and 100%, in the context of very strongviews on currency movements, and between say 25% and 75% otherwise. Beyond this time horizon, it might seem imprudent to take morethan say 75% or even 50% of cover, even with very strong currencyviews, in case the eventual cashﬂows in that currency are less thanforecast.One possible approach is to use a value-at-risk (VaR) measurement to quantify currency risks and to set a VaR limit to determinehow much should be covered at any point. This is covered more inChapter 12. One problem with applying VaR to corporate currencyexposures is that a company generally has a relatively small numberof exposures at any one time, compared with a bank. As VaR isa statistical approach, the risk might be rather great of the VaRmeasurement being misleading.
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Which instruments?There is then the question of which instruments the company shoulduse for hedging. For economic exposures, it is often more a question ofplanning – perhaps diversifying the company’s markets, sourcing andmanufacturing base. For transaction exposures, the most commonform of hedge is a forward currency deal whereby foreign currencycan be sold or bought at a ﬁxed exchange rate for delivery on afuture date. There are other forms of hedge, such as foreign currencyborrowings and deposits, although these provide the same effectivehedge as forward sales and purchases of foreign currency, becauseof the link between forwards and interest rates.An alternative is for a company to buy a currency option, wherebyit pays an up-front insurance premium for a contract to cover anexposure at a particular rate. In return for the premium cost, thecompany has the ﬂexibility not to use the contract if it turns out notto be advantageous. The rate used in this case can also be set ata different level from the actual market forward rate – although thisaffects the size of the up-front premium. Although more complex, thepurchase of an option for hedging requires the same basic considerations as a forward deal – i.e. the comparison of the forward rateavailable, with the company’s forecast rates and its own target rates.As long as the instruments are properly understood, a company’spolicy document could reasonably include all available market instruments as permitted within the policy when appropriate. There should,however, be restrictions on how they are used. For example, buyingan option to sell the currency of a receivable can clearly be seenas a hedge, whereas selling an option is far more likely to createrisks. Care must also be taken over synthetic bank products whichhybridize options. A range forward, for example (setting maximumand minimum exchange rates within which a deal will be settled),is essentially exactly the same as buying one currency option andsimultaneously selling another. If the company is for any reason nothappy to authorize using the underlying options, it should also not behappy to authorize dealing in such quasi-forwards – although such aproduct is generally quite acceptable.Another area of fuzziness relates to foreign currency borrowings.Companies sometimes maintain signiﬁcant borrowings in a foreigncurrency which bears a low interest rate, but in which it has nocommercial interest, explicitly in order to achieve lower borrowingcosts. However, the same company would often be quite opposed tothe idea of making forward sales of those same currencies, becausethey would be speculative. The 2 actions are of course economically
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equivalent. If the forward sales are not authorized, why should theborrowings be?
Who is responsible?Some more mechanical issues are just as important. Who exactly isresponsible for dealing? Perhaps the treasury assistant may deal forup to a certain amount and up to a certain period ahead, the treasurerup to a greater amount and further ahead, and the ﬁnance director’sagreement is necessary beyond these limits. What controls are inplace to ensure that these limits are respected? Are regular meetingsscheduled to review exposures, markets, strategies and targets?The detailed answers to all these questions must vary from companyto company. The importance lies in forcing everyone concerned toconsider the questions in the ﬁrst place, to review them regularly,and to arrive at answers which everyone understands and respects.
Forecasts, hedging decisionsand targetsAn important issue regarding forecasts is that in trading for speculative proﬁt, a bank dealer is seeking to maximize currency gains onthe basis of forecast currency movements. In protecting a commercial position, however, a treasurer cannot afford to be as aggressiveregarding forecasts. For example, if the current US dollar/Swissfranc rate has already fallen to the absolute minimum at which heis prepared to sell 6-month dollar receivables into francs, he shouldprobably act to take cover now – even if this is contrary to his forecastwhich suggests that the dollar is likely to strengthen. The forecastmight, after all, be wrong. This is a question of weighing up thepossible opportunity loss (if he covers the receivables now and thedollar strengthens) against the possible loss against target (if he doesnot cover now and the dollar weakens). The practical importance ofclear corporate objectives is in laying the ground rules for decidingbetween such choices and hence how boldly forecasts should befollowed at different times.
Setting commercial target ratesThis raises the question of the exchange rate at which a companywould be happy to hedge any particular exposure if possible. If acompany wishes to hedge ﬂexibly, according to its view of exposures and the currency markets, it is important to have a basis forestablishing commercial target exchange rates at which the company
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would like to be able to hedge exposures. It is of course impossibleto deal at a rate better than that which is actually available in themarket – and ﬂexible hedging implies an attempt to hedge at a betterthan average exchange rate over the life of the exposure, regardlessof targets. In practical terms, however, always obtaining the bestexchange rate is impossible, and it is valuable to have in mind atarget based on acceptable levels of proﬁtability, given the underlyingcommercial situation.
It is important that such a commercial target rate should bebased on commercial proﬁtability, rather than on a budget rateunrelated to proﬁtability calculations.
Suppose, for example, that our company is based in euros but paysfor imports in Swiss francs. Is it possible to assess an exchange rate atwhich the company makes proﬁtable commercial business? Perhaps,for example, if we can buy our francs at 1.70 then we will just meetour anticipated target return on our commercial business overall.This kind of consideration helps to establish commercial target rateswhich should be treated as very important levels by those doing theday-to-day dealing. Usually the only reason for ignoring such a targetis a certain forecast by the dealer that the exchange rate will improve;however, the only certain thing about forecasts is that they can gowrong!
Setting short-term dealing targetsWithin the commercial targets, it is also helpful to set short-termdealing target levels at which to take action. There is often a dangerthat the company has determined a level at which it would wishto deal, and which it thinks is likely to be near the best available rate – but that when the market reaches that level, it hesitates;perhaps now is not quite the perfect moment to sell or buy; perhapsit is worth waiting a little longer. Unless circumstances have changedto alter the basic forecast, it is often wiser to act on its own predetermined targets. No-one can hit tops or bottoms all the time, and fromthe point of view of corporate hedging it is often dangerous to try.In setting such short-term targets for dealing, it is useful to be ina position to monitor easily progress so far in covering an exposure:How big is the whole exposure? Is it signiﬁcant to the company’soverall position? What percentage of the exposure has already beencovered? At what average rate? If the remainder of the exposure werecovered now, what would be the average rate for the whole exposure?
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Answers to these questions help to deﬁne the risks being faced, andhence establish whether in fact it is appropriate to take a more, orless, cautious approach.
Range forecastsFor hedging, it is always useful to widen the scope of a forecast. Ifthe company is looking at the US dollar/Swiss franc exchange ratein exactly 6 months’ time and forecasts a single number for this, it isalmost certainly going to be at least slightly wrong. It is better to askthe following questions also:• What are the highest and lowest rates likely in 6 months’ time?• What is the maximum trading range for the rate likely to bebetween now and then?• Where is the rate likely to be moving over the longer term?• What are the risks and probabilities surrounding these forecasts?The point here is that if the company accepts that the forecastis unlikely to be precisely correct, it must be prepared to cover anexposure at an exchange rate which is a good one in the context of itswider expectations of market movements, rather than expect to dealat the tops and bottoms of the market. If the highest rate likely in6 months’ time is only slightly higher than currently available, but thelowest is very much lower, it might be more prepared to sell now thanwait. A very wide expected trading range might suggest that it couldbe more optimistic when targeting a hedging rate better than today’slevel, despite a generally adverse trend. If the longer-term trend isexpected to be unfavourable, it might be more cautious regarding afavourable short-term forecast.Example 10Suppose that the GBP/USD rate is 1.40 now, and that it isforecast to be 1.30 in 3 months’ time. Suppose also that the rateis forecast to reach both 1.45 and 1.25 during the next 3 months.Exactly how a company might respond to these forecasts coulddepend on its situation.If, for example, our company has an important target to sellsterling at 1.35 or better, and has taken no cover so far, onemight recommend selling much of the requirement now at 1.40.The company is unlikely to hit the top of the market (expected at1.45), the current rate is better than the important target level,and if the company waits too long, the rate might in fact soonfall below that target.
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Consider now a different company looking at the same forecast.This time, the company has a target to sell sterling at 1.30 andhas already sold some sterling forward at 1.45. In this case,the company might feel more able to wait, aiming for higherthan the current rate. If in fact a higher rate is never seen, theopportunity loss is probably not as serious commercially as itwould have been for the ﬁrst company.These are not formulas to be followed, but general examples tosuggest the value of having a clear objective and, as suggested above,forecast ranges rather than single-point forecasts.
Forward premiums and discountsAnother forecasting issue concerns forward premiums and discounts.It might be, for example, that the discount for selling a currencyforward is so great that a precise forecast becomes of less value. Forexample, there might be a difference of 6% between South Africanrand and US interest rates, so that one could sell US dollars oneyear forward against rand at a premium of 6%. Unless the rand isexpected to weaken by more than 6% over a year, it could be betterto sell dollar receivables forward against rand (or buy 12-month randpayables against dollars). Put simply, the forecasting question is: ‘‘Isthe rand expected to weaken by more than 6% against the dollar overthe next year?’’ It is important to consider forecasts in the context offorward exchange rates for the period rather than just spot exchangerates.The same 12-month forward premium available might later fallsharply, again reﬂecting the interest rate differentials between therand and the dollar. It is therefore important to forecast not onlyhow a spot exchange rate might move, but also how the forwardpremium or discount will change, particularly when selling or buyingforward for longer periods since the premium or discount will becorrespondingly greater. This in turn means forecasting interest ratechanges.Some important elements of a written policyWhich exposures it is possible, or desirable, to manage?What should the treasurer be trying to achieve?How is speculation deﬁned?Should exposures be managed net or gross?Is parallel hedging acceptable?
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Under what circumstances can existing cover be reversed?Over what future period is it desirable to manage exposures?Is the amount of cover taken automatic or ﬂexible?Which instruments should the company use for hedging?Who is responsible, who is permitted to deal, and to whatextent?What are the commercially based target exchange rates?What is the system for monitoring exposures and existingcover?What controls are in place to ensure adherence to the policy?
Currency exposure reportingA company’s reporting systems should be designed with the objectiveof providing the necessary information for the management of thecompany’s overall currency positions. The reporting systems shouldcover three areas:1. Reporting from operational divisions to the ﬁnance department2. Internal reporting within the ﬁnance department3. Reporting from the ﬁnance department to operational divisions
Reporting from divisionsThe reporting from the operational divisions to the ﬁnance departmentmust form the basis for all currency management decisions; it istherefore crucial that accurate information is available regularly.The reporting systems should cover all currency ﬂows and should bebased on the timing of anticipated cashﬂows rather than the timing ofsales and purchases. It is important that all divisions monitor closelytheir collection and disbursement periods to ensure that currencypositions based on purchases and sales are accurately reported inthe period in which the funds are expected to ﬂow.Under an annual budgeting procedure, all divisions should reporta detailed breakdown of cash payments by currency and by monthfor the full year of the budget. Inﬂows and outﬂows of each currency,in each month, should be reported separately.As part of the normal monthly reporting system, divisions shouldcommunicate the same information as in the annual budgeting procedure but based on a rolling 12-month time horizon. At the sametime, divisions should update cashﬂow positions within the periodby communicating changes in volume expected and also changesto the timing of cashﬂows. Major changes to the previous reported
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ﬁgures should be highlighted if possible so that the appropriatecurrency management decisions can be implemented for the changedpositions.In addition to the regular monthly reporting of exposure positions,each division should report major changes to exposures as soon asthese become known.
Internal reporting within the ﬁnance departmentOn receipt of each division’s budget submissions and monthlyupdates for inﬂows and outﬂows, the ﬁnance department shouldproduce a consolidated position for each currency for the wholegroup. This consolidation should again be done separately for inﬂowsand outﬂows and then, for those currencies with two-way ﬂows, a netposition produced.The summary for each currency should show total positions foreach month, as well as the amount of cover already taken and theactual rate dealt. Where the position remains at least partly open,the current forward rate to maturity should be used to quantify theremaining exposure. This, together with the cover taken already, canbe compared with the total original exposure converted at a target orbudget rate. In addition to the summary of the exposures reports, theﬁnance department should preferably produce a cash receipts andpayments report for each division, to highlight differences betweenprojected cashﬂows and actual cashﬂows.The ﬁnance department should maintain a register of alloutstanding forward currency contracts for both sales and purchases.The register should be maintained by currency and show the date onwhich the contract was opened, the two currency amounts, the rate,the maturity date and a reference to the commercial position againstwhich the contract was taken.
Reporting from ﬁnance department to divisionsIn addition to reporting from the divisions to the ﬁnance departmentand within