Harnessing a holistic view of FX risks to deliver improved hedging outcomes

The challenge

The Baker Hughes corporate treasury exposure management transformation journey began with the merger of Baker Hughes Incorporated and GE’s Oil & Gas business in 2017. The combined company (“the company”) operates in more than 120 countries and generates over US$20bn revenue. Treasury manages the FX risk, arising from the operational and funding requirements, across this global footprint, supporting subsidiaries that transact in 80+ currencies.

The scope of FX risk management varies from managing cash flow FX risks on multi-year projects where the company designs and installs equipment vital to the energy value chain, along with FX risks arising from short-cycle cross-border delivery of services and from the company’s internal supply chain and funding strategies.

The initial approach focused on contribution margin protection from volatility arising from changes in FX rates. Additionally, the economic unit in which hedging decisions were made was at a business division level. The company observed that this approach led to a grossing up of its derivative book which increased cash flow volatility for the company from derivative settlements, increased counterparty exposure risk and increased hedging costs.

The solution

The initial idea was to see whether it could net exposures across the company while still protecting contribution margins and cash. To develop a solution, Baker Hughes took a deep look at how it executed derivatives and how it measures exposures to see what netting benefits could be obtained. Through this analysis the company identified ‘natural’ offsets and developed an approach to utilise internal derivatives to measure the netting benefit and establish the net company risk position to hedge externally.

To implement this in a manner that was well controlled and limited manual effort, the company implemented the following key capabilities:

• Company level exposure view – developed automated tools and implemented processes to establish a holistic view of FX risks for each currency.
• Focus on natural FX offsets – identified FX exposure natural offsets across subsidiaries for all related operational and funding transactions from current and future transactions.
• Trade execution process changes – identified a standardised date for a given time period to enable internal netting calculations to be performed and derivatives executed on a net basis.
• Develop quantification metrics – established new metrics to measure the effectiveness of these new processes and sought continuous fine tuning to further benefits.
• Developed option based hedging strategies – established break-even analytical tools to implement decision making frameworks for alternative hedging solutions.

Best practice and innovation

In a challenging external environment for the energy sector and increasingly volatile financial markets, the FX risk management solutions implemented have provided tangible and significant benefits to the company.

Key benefits

• Quarterly cash flow volatility from derivative settlements reduced ~80%.
• Counterparty exposure on derivatives reduced by ~45%.
• Hedging costs reduced by ~30%.