Magazine article Business Credit

The Responsible Party

Magazine article Business Credit

The Responsible Party

Article excerpt

If you're the treasurer of a company that deals in derivatives, are you comfortable with your role in managing the exposure? In GE's treasury department, we take on the risk-management responsibility using six approaches. First, we help our business units understand both their direct and indirect currency exposures. Second, we provide technical and fundamental analyses to the business units. The fundamental analysis is our macro-economic view of a country and its currency and interest-rate environments; the technical analysis is our detailed look at the technical support and resistance levels for particular currencies, since hedge funds are so systems-driven.

We also recommend hedging strategies to our businesses, and then we execute the strategies. By centralizing the exposures, we leverage the purchasing power of GE, get better control, and realize more efficiencies.

The GE treasury staff manages the company's positions. Every day, we mark to market our exposures - and we can do so even more frequently if a currency significantly moves during the day. We outsource our foreign-exchange confirmation process to a vendor that electronically confirms our trades on a realtime basis with our 10 foreign exchange banks.

Finally, we identify internal offsets and netting opportunities. For example, if our NBC affiliate has a yen receivable and our appliances group has a yen payable, we'll consider an internal offset.

GE's risk-management policies are fairly typical. We're risk averse, and we don't speculate. We use the FASB's definition to avoid speculation: Are we hedging without a firm commitment? Are we overhedging, or doubling up, a position? Are we managing the position? We believe if we're managing a position with an instrument other than a hedge (for example, a stop/loss order), that's not speculation.

We use a portfolio approach, combining 50 percent forward contracts, 25 percent currency options, and 25 percent stop/loss take-profit orders, although we do adjust the formula slightly if we have a strong view on a currency, a larger margin on a particular product, or a different competitive situation.

The forward contract is an agreement with a bank - a derivative - that allows us to sell the bank our future yen flow, for example. The bank in turn pays us in dollars, because that's our functional currency, on a future date. No monies change hands on day one. The bank gives us an exchange rate for the future date, which is the interest rate differential between the U.S. dollar and the Japanese yen for a specified time period. One caution here: The forward rate we get from the bank is not the bank's forecast. Some companies have this misconception.

More complex than forward contracts, currency options offer tremendous flexibility. For instance, if you hedge your yen receivable at 100 yen per dollar with a forward contract, you'll get $1 for every 100 yen you deliver to the bank in, say, six months. If you hedge your yen receivable with a put option at 100 yen per dollar and, at the option expiration date, the market exchange rate is 92 yen per dollar, you'd let the option mature while you convert your yen to dollars at 92 yen. This would result in more dollars for you because it would require eight fewer yen to buy that $1. Note, however, that you do need to pay a premium up front for the option, but you can amortize it over the life of the exposure or expense it in the month you incur the cost. …

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