Hedging Tutorial part 3

Slide 1: 

Currency Hedging for Capital Projects: Hedging Overview and Process Changes for 2011 Part 3: New Process and Usage of Hedging Reports

Conditions for an Offset to Match:: 

Conditions for an Offset to Match: PO Creation Invoice Pay Exchange Rate – Driven Change in Project Expense Offsetting Gain or Loss from Hedging Activity €1 = $1 PO Date €1 = $1.2 Invoice Posting €1 = $1.3 Invoice Pay

Conditions for an Offset to Match:: 

Conditions for an Offset to Match: Exchange Rate – Driven Change in Project Expense Offsetting Gain or Loss from Hedging Activity €1 = $1 PO Date €1 = $1.2 Invoice Posting €1 = $1.3 Invoice Pay

Conditions for an Offset to Match:: 

Conditions for an Offset to Match: Exchange Rate – Driven Change in Project Expense Offsetting Gain or Loss from Hedging Activity €1 = $1 PO Date €1 = $1.2 Invoice Posting €1 = $1.3 Invoice Pay On Budget! €1 = $1 €1 = $1.07 €1 = $1.14 Still On Budget! €1 = $1.20 How did we go $200,000 over budget?! $200,000 Hedging Offset No visibility to project expense No visibility to hedging offset Invoice posts. Suddenly, there’s visibility to project expense!! But, still no visibility to hedging offset

Hedging Report: 

Hedging Report

Hedging Report: 

Hedging Report

Hedging Report: 

Hedging Report

Hedging Report: 

Hedging Report

Hedging Report: 

Hedging Report

Hedging Report: 

Hedging Report

Hedging Report: 

Hedging Report

Hedging Report: 

Hedging Report

Hedging Report: 

Hedging Report

Hedging Report: 

Hedging Report

Hedging Report: 

Hedging Report Plug this gain or loss into a budget tracking spreadsheet after the invoice posts

Using the Reports: 

Using the Reports Exchange Rate – Driven Change in Project Expense Offsetting Gain or Loss from Hedging Activity PO Creation Invoice Posting Invoice Pay No Δ in project expense No need for hedging offset report Δ in project expense hits! Engineers need hedging offset report!

Using the Reports: 

Plug hedging offset from most recent report into budget tracking spreadsheet Using the Reports Exchange Rate – Driven Change in Project Expense Offsetting Gain or Loss from Hedging Activity PO Creation Invoice Posting Invoice Pay Δ in project expense hits! Leave that plug in the spreadsheet until invoice pay & hedge release Engineers need hedging offset report! When hedge is released and booked, remove the original plug (hedging offset) from budget tracking

A quick word on PPE rates: 

A quick word on PPE rates Exchange Rate – Driven Change in Project Expense Offsetting Gain or Loss from Hedging Activity PO Creation Invoice Posting Invoice Pay On Friday of Week 4, that day’s (“spot”) exchange rates are entered into SAP. Those exchange rates go into effect two days later, on the first day of the period. They apply to every invoice posted throughout the period. This means invoices are posted at an amount that is converted to dollars at the “prior period end rate.” So when the invoice posts, the rate could be up to 28 days old. Since the invoice posts at the prior period end rate , the correct offset is from the report run on the prior period end date . So, when an invoice posts, the corresponding offset can be found in the most recent report. Invoice posts at the prior period end rate Hedge report is run on the prior period end date

Recap: 

To clarify: In the 60 days between posting and pay, the back office will continue to send reports. In those reports, the unrealized hedge for invoices that posted in previous periods will continue to fluctuate. Disregard these fluctuations and leave the original plug in budget tracking After the invoice is paid, the hedge is released, and the realized hedging gain or loss is booked back to the project. The project expense fluctuation between invoice posting and invoice pay is also booked back to the project. [Leg 1 Δ project expense] + [Leg 2 Δ project expense] is offset by the realized hedge. After the invoice is paid, Leg 2 Δ project expense is booked, and the realized hedge is booked, the project is made whole. So, when the realized hedge is booked to the project, delete the plug for the unrealized hedge from the budget tracking. --- Note: the realized hedge is not identical to the initial plug, because it also offsets the second leg of project expense fluctuation. Now that the project is whole, it’s time to delete the “plugged” unrealized hedging offset from the budget tracking spreadsheet. Otherwise, the hedging offset for the Leg 1 fluctuation in project expense will be double counted. Until the invoice posts, no exchange-rate driven fluctuation has impacted project expense. Any open hedges whose corresponding invoices have not posted should not be plugged into budget tracking. The offset, as it appears in the most recent report before an invoice posts, has now been plugged into a spreadsheet for budget tracking. Please do not update that plug in subsequent periods. Recap Exchange Rate – Driven Change in Project Expense Offsetting Gain or Loss from Hedging Activity PO Creation Invoice Posting Invoice Pay The fluctuation in project expense during Leg 1 hit the project at invoice posting. The fluctuation in project expense during Leg 2 is booked back to the project immediately after the invoice is paid. The realized hedge is a proper offset to the sum of these fluctuations. When the invoice posts, look at the most recent hedging report. Plug the “MTM Gain/(Loss)” into budget tracking. The posted amount and the unrealized offset should net to mitigate all exchange rate driven fluctuation

Condensed Instructions: 

Condensed Instructions You will receive a hedging report on the last day of each period. It will be used for invoices that post in the coming period. When an invoice posts: look at the hedging report that was sent out on the last day of the most recent period (as of the posting date). In that report, find the open (unrealized) hedge for the invoice that has just posted. Plug the figure in the “MTM Gain/(Loss)” column into your spreadsheet for budget tracking. Used as an offset, it should bring the invoice expense in line with the expectations at the PO date. Leave that plug, as is , in the spreadsheet until the invoice is paid and the hedge is realized. The unrealized value of that hedge will change in later reports. But if you’ve already plugged in an offset, simply disregard later reports on those unrealized hedges.

Condensed Instructions: 

Condensed Instructions When the invoice is paid, the hedge is released and booked back to the project. When the hedge is booked to the project, take the offset “plug” for that invoice out of the budget tracking spreadsheet. Remember, the “plug” factored in the hedging offset for Leg 1 only. But now, the offset for the whole timeline, Leg 1 and Leg 2, has been booked to the project. And, those booked numbers are in your spreadsheet. So, the “plug” has to be deleted, or the spreadsheet will be “double counting” the offset for Leg 1 project expense fluctuation. Now, all expense has hit the project. This expense includes exchange-rate-driven fluctuations. And, the hedge has been booked to the project, to offset the exchange-rate-driven fluctuations. Expense is now in line with the expectations at the PO date.