Currency analytics comprise the framework, technology and tools that enable global companies to manage the risk associated with currency volatility. Currency analytics often involve automation that helps companies access and validate currency exposure data and make decisions that mitigate foreign exchange risk.

Currency analytics and risk management

Companies that do business in more than one

currency A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a ''system of money'' in common use within a specific envi ...

are exposed to

exchange rate In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of ...

risk – that is, changes in the value of one currency versus another. Exchange rate risk (also known as foreign exchange risk, risk, or currency risk ) is especially high in periods of high currency volatility. This volatility can impact a company's

balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...

and/or

cash flow Cash flow, in general, refers to payments made into or out of a business, project, or financial product. It can also refer more specifically to a real or virtual movement of money. *Cash flow, in its narrow sense, is a payment (in a currency), es ...

: Corporate currency analytics help companies manage currency risk in both areas.

Balance sheet risk

In the process of remeasuring transaction currency monetary

asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...

s and liability account balances, the difference between the exchange rate when the transaction was posted and exchange rate when the transaction was cleared goes to the functional entity's

income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''statement o ...

as an FX gain or loss. Then in the process of translating the functional entity's income statement for the reporting entity's consolidated income statement, that FX gain/loss gets translated at current income statement rate to reporting currency and appears on the consolidated income statement. Managing balance sheet risk can involve organic (natural) hedging such as using cash positions or intercompany

loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...

s to create exposure offsets. It can also involve external hedging such as buying a forward contract to offset FX exposure. See Foreign exchange hedge and . In both cases, efficient hedging depends on being able to drill down into the

to see the currencies of the transactions sitting on the company's books around the world. Currency analytics automates that drill-down process and presents balance sheet exposure data in an easy-to-use dashboard that allows companies to efficiently manage balance sheet risk and minimize FX gain/loss.

Cash flow risk

In the process of translating the functional entity's income statement,

revenue In accounting, revenue is the total amount of income generated by the sale of product (business), goods and services related to the primary operations of a business. Commercial revenue may also be referred to as sales or as turnover. Some compan ...

cost of goods sold Cost of goods sold (COGS) (also cost of products sold (COPS), or cost of sales) is the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of the several formulas, including specific iden ...

(COGS), and

operating expense An operating expense (opex) is an ongoing cost for running a product, business, or system. Its counterpart, a '' capital expenditure'' (capex), is the cost of developing or providing non-consumable parts for the product or system. For example, t ...

s (OpEx) get translated at the current income statement rate to reporting currency and appear on the consolidated income statement. Currency impact to revenue, COGS, and OpEx arises from differences between the current income statement rate and the forecasted rate. Managing cash flow risk is fundamentally about protecting the economic value of the company's future flow of cash from being eroded by currency volatility. It can involve organic (natural) hedging such as pricing contracts in a particular currency. It can also involve external hedging, but accounting rules require matching hedges to forecasted cash flows and don't allow hedging economic risk. Currency analytics allow companies to mitigate cash flow risk by uncovering accounting exposures to match the economic exposures so the company can hedge the accounting exposure as a proxy. Currency analytics enable "what/if" scenario analysis so companies can model how volatility in particular currencies could impact their revenue and expenses in the future.

References

{{Reflist Currency Foreign exchange market Analytics Financial risk management