Foreign Exchange Benchmarking


Businesses Currency Exposures Risk

Foreign Exchange Benchmarking can be made easy by using currency brokers as with foreign exchange benchmarking the business would state where it would like its exposures to reach.

a) The Business will set a benchmark for its exposure management practices inhouse or utilise a company to deal with this.

b) The foreign exchange benchmarking will be set for 6 months periods.

c) The foreign exchange benchmark would be based and incorporate the following principals;

d) The foreign exchange bench-marketing set should be realistic and achievable.

- “Should Exposure Management Practices be conducted on a **Cost Centre** or **Profit Centre** basis?”
- Any Forecasts should be discussed and agreed upon at an early stage, where the Benchmark should be the Probabilistic Expectation of the rate in question.
- The Forecast risk, Market and Transaction risk, and Systems risk should be discussed and agreed upon at an early stage.
- Room for error in keeping with any Stop Loss Margin you have set in place.

- Businesses that have trained personnel dealing with exposure could look at a "long-term Capital scenario" where the business is looking to manage them on a **PROFIT** Centre basis, since the exposure are not open to day-to-day business risks.
- Businesses whose exposures are of "Short-term Revenue" scenario should manage them on a COST Centre basis, since the exposure impact the Profit and Loss Account directly.

Profit Centre Concept

Under a profit centre concept, the Exposure broker is required to generate a NET Profit on the exposure over time. This is an aggressive stance implying a high degree of risk appetite on the part of the broker. A business with a strong position and healthy books and bank balance can afford to take some financial risk and can opt for this concept.

The Benchmarks under a Profit-Centre concept would take the form of “The total cost of a foreign currency loan should be reduced by at least 25 bp over a one year period, from the forecasted rate of x.x% p.a.”

Cost Centre

Under a cost centre concept, the Exposure broker would be required to ensure that the cash flows of the business are not adversely affected beyond a certain point. This is a defensive strategy, implying a lower risk appetite. A business whose cash-flows are volatile, or whose underlying business is not on a very sound footing would be advised to adopt this concept.

The Benchmarks under a Cost-Centre concept would take the form of “Foreign Exchange fluctuations should add no more than x% to the cost of Imported Raw Material over and above the budgeted cost.

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