A major utility with substantial exposure in the UK complained their FX hedging strategy for stable GBP revenues failed to capture market movements accurately resulting in excessive earnings variance.

 

FXP analyzed their accounting framework and recognized a timing mismatch between the maturity of the hedges and the way in which the company accounted for them.  The company was utilizing average rate forwards to manage the risk.  FXP suggested they adjust the averaging period such that only 1% of the average was reflected in the accounting month with the remainder reflected in the exposure month.  This allowed the company to close their books appropriately and simultaneously match the actual cash flows generated.

 

The company’s earnings variance completely disappeared after the policy change with both Treasury and Accounting departments completely satisfied with the outcome.

A large industrial company announced an acquisition of a European competitor to expand its presence.  A key issue was acquiring the requisite EUR to complete the transaction at the best possible price.

 

FXP recognized the nature of their business and recommended the company consider writing (selling) EUR puts / USD calls with strike prices below the current spot market, and far below the current forward market.  This was constructed as an enhanced dual-currency deposit to achieve favorable accounting treatment.

 

The company was able to improve the return on its cash balances via the deposit with the caveat if the euro declined, their USD would be converted to EUR.  However, because the company needed billions of EUR to complete the acquisition, they were happy to take this risk.  The company ultimately executed this idea in quite large amounts and was very pleased with the overall results of enhanced returns and inexpensive acquisition of required euros.