Practices and barriers for managing FX market volatility.

• Author: Kogan, John
• Position: Treasury - Financial exchange

The financial meltdown in Greece and the resulting euro crisis have served as glaring reminders to senior executives that effective management of foreign exchange exposure needs to be a key strategic focus at global organizations.

Effective FX exposure management comes down to systems, processes and people. Together, these elements enable managers to:

* Define the sources and causes of currency exposures;

* Access the risk associated with currency exposures, including the volatility within and across currencies to which exposures exist;

* Provide a decision framework to define desired levels of risk and reduce exposure to these levels through trading, deal structure or changes in business practices; and

* Define benchmarks that measure the effectiveness of exposure management and mitigation.

Systems. The systems component of an FX exposure management program should be designed to facilitate accurate and timely multicurrency visibility and accounting, ensure consistent methods and sources of rates utilized in currency conversion and allow timely and efficient extraction of the data necessary to measure, monitor and manage the exposure to any given currency and to all of a company's currency positions together.

Process. FX exposure management processes, meanwhile, define who does what and when within treasury and related organizations. These functions would include data entry and aggregation, exposure calculations, assessment of risk related to any currency, a decision framework to address or accept currency exposures, planning and analysis and approval and execution strategies that are efficient and still have the necessary controls.

People. In the end though, it's people that ultimately determine the effectiveness of FX exposure management. A well-designed program can be rendered useless, or worse, without the right individuals in place, and these people need to have a sense of accountability for their individual roles in the success of the program.

The results of a recent global study conducted by FiREApps Inc.--a provider of on-demand FX exposure management--and Sungard Inc., a software and technology services company, offers some practical insights into the inherent barriers to success faced by firms in effective FX exposure management. It suggests that the divergence between theory and practice in terms of the results of FX exposure management practices for companies is driven by:

1. Lack of complete, timely and accurate data;

2. Lack of...