Insight & Analysis

Getting the message on currency requirements

Published: Apr 2024

The experience of fibre optic solutions provider AFL Global shows FX risk management strategies may have to go through multiple iterations before hitting the mark.

Mutiple different coloured envelopes

Owned by Tokyo-based electrical equipment manufacturing company Fujikura, AFL employs more than 6,500 people worldwide with 46 offices and manufacturing locations.

The company centralises and tries to have oversight where it can, explains Corporate Treasurer Holly Olson. “When I joined the company our treasury operations were completely decentralised, but it seemed to make sense to centralise our FX and leverage the expertise within the treasury team,” she says.

AFL conducted some back-testing, starting with its Mexican subsidiaries whose need for Mexican pesos made it the largest foreign currency the company was purchasing. It quickly recognised that the delivery of pesos was getting delayed at the correspondent bank in Mexico, which was a challenge because the currency was needed to meet labour costs and to pay local expenses and taxes.

“We decided to look at other options and eventually went with one of the larger global banks with a presence in Mexico that was able to execute payments in a more timely fashion,” says Olson. “We determined that by centralising FX risk management and enabling corporate to negotiate pricing and implement hedging strategies we could save around one per cent of the currency exchange costs of these subsidiaries, which was a substantial dollar amount.”

But as the company became more efficient it started to see some flaws in this approach. Because these subsidiaries are contract manufacturers whose volumes are based on customer orders, demand for local currency fluctuated and AFL often had limited time to purchase and deliver the pesos, meaning they were being delivered on a ‘best effort’ basis.

“So we had solved the correspondent bank issue, but we still had a problem with delivering the currency on a timely basis,” says Olson. “We moved the bank account into Mexico – which allowed us to purchase pesos in advance – but this meant holding large volumes of a volatile currency and having to book foreign currency gains and losses.”

Maintaining these holdings at operational levels meant the company could not always meet the need for pesos to pay local taxes, so it moved to having the subsidiaries purchase the pesos locally, which felt like a backward step.

At that point Olson recalls being on a pitch call with Bank of America during which the conversation turned to an instant cross-border payments solution, which she felt would enable AFL to get good pricing while delivering the currency at the right time by converting US dollars to pesos in real time.

“When the bank asked us if we would beta test this service we were all over it and we are still working on the implementation,” she says. “We hope it will be up and running later this year.”

Having started out from the premise of having a one-size-fits-all approach to FX risk management, the company now has a multi-tier strategy where it hedges pesos to lock in the rate and take advantage of positive forward points, maintains a peso bank account balance in Mexico to facilitate operational costs, and can make real time payments when required.

“We are hedging our high confidence dollars so whatever the hedge amount is, we know that is a good number,” says Olson. “Then we maintain a Mexican bank account at balances that have a medium cost because obviously we might be going into the marketplace at any time, so we are making sure we have the right balance in place when we need it based on the average operational level.”

The higher cost transactions are for low confidence items that AFL is not able to project. “When that need materialises we know it is urgent and we can just isolate these payments on this other real time Mexican peso service,” adds Olson. “All these tiers help us achieve what we set out to do, which was to reduce our overall execution costs.”

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