While few would deny the important role that treasury organisations perform for companies, bridging the gap to understanding its real strategic value is crucial. For companies to grow and succeed, a whole range of things need to align and treasury organisations sit in a position to be just that strategic tool. Can companies use better foreign exchange (FX) risk management strategy and technology in a way that delivers shareholder value?
This question highlights the way that treasury organisations can impact on the overall performance of a company. FX risk management is one crucial, but potentially underappreciated, area where treasury can demonstrate a “mission-critical” importance to business. But how can corporates shift foreign exchange risk management into a position which allows it to truly add value?
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Anatomy of risk
Any consideration of FX risk management must first examine its structures and principle concerns. What exposures does the company face? What is the board-sanctioned risk management policy? And, what buy-in is there from the business units that pay for risk mitigation, or own any risk they don’t want to pay for?
Treasurers looking for lessons on setting up and maintaining a scalable FX risk process need to distinguish between must-haves and the rest. This is without looking at how technology changing the internal corporate FX exposure identification process, the FX market and the interplay between the two.
Travel industry and FX – a unique case
FX risks tend to be outsized and complex within the global travel industry. These companies complete large numbers of transactions across borders and currencies for businesses and consumers are particularly exposed to exchange rate fluctuations. This means that FX hedging programs are critical to the overall performance of the business, elevating treasury to a strategic enabler for the company.
When compared with other industries and sectors, travel companies are uniquely vulnerable to the FX market. More importantly, when it comes to FX risk management there is a subtle, but important, distinction between the two most prevalent business models in the sector: “agency” and “merchant of record”.
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By GlobalDataIn the agency model, the travel agent collects commissions on bookings whereas in the merchant model, the travel agent collects the whole amount of the booking. In practice, this means that merchant of record travel agents are exposed to gross flows. This further exposes them to FX risk, as the sums involved are far greater than in commission-only transactions.
Results-driven, strategic risk management
Ultimately, the importance of treasury in supporting FX risk management relies on leading-edge processes. In the case of Expedia Group, we understood the necessity of revisiting those internal tools to re-build platforms (in this case our FX tools) and improve processes. One barrier to success in any type of overhaul of systems is the uncertainty and potential expense, so any solution had to be mindful not to disrupt day-to-day business.
Shifting from a monthly to a real-time exposure aggregation process to a gave us the chance to design the system more responsive to our needs. For example, we can deliver much lower costs, while at the same time reducing operational risk. In terms of results, we have seen year-on-year progress since we revamped our hedging program in 2014, with considerably greater effectiveness when compared with hedge program results for the two years prior.
Customisation for success
A key learning from our project was that in the case of improving treasury functions, it is not just about adopting tech, but ensuring the technology is the right one for your business. While customisation is not the right fit for all, off-the-shelf solutions may not be a silver bullet for all. Instead, adapting platforms to fit the exact needs of the business – in the case of our industry, high levels of FX exposure compared with other sectors, means that the emphasis has to be on getting FX risk management correct.
John Zavaglia, Senior Director, Treasury Capital Markets, Expedia Group
Charlie Herche, Director, Treasury Capital Markets, Expedia Group
