Exposure detection and management
Detection of Exposure
Proper identification of the financial exposures is of high significance to the Company. When the main objective of the Company is usually maintaining the work plan as defined by the Company's management, to meet the budget targets, and to reduce the volatility of the various items in the financial statements
Cash flow exposure
Cash flow exposure is usually the most significant exposure a company faces. This exposure derives from the company’s cash flows and when there is a loss, it directly affects the business results shown on the profit and loss financial statement. In order to avoid harming cash flow, we offer a variety of financial hedging instruments designed to reduce the risk of exchange rate fluctuations, and fix the rate to that set in the company’s budget, or at a rate agreed upon by the company as the target price.
Accounting exposure refers to line items that may erode or increase due to changes in exchange rates, thereby contributing to an increase/decrease in the company’s profit and loss. Our examination of companies’ accounting exposure is conducted concurrently with the examination of the cash flow exposure. Although it is impossible to connect the exposures, a parallel vision is usually best for the company, and has the potential to save a substantial sum when executing the hedge.
Applying hedge accounting
Applying hedge accounting – Hedge accounting is intended to reflect the results of companies’ economic hedging activities. We will help your company examine the feasibility of using hedge accounting in various sections of your financial statements, and accompany you regularly throughout the process.
Building a Hedging Policy
Building a hedging policy is one of the most significant issues for Company’s management and it's the Board of Directors. When we formulate the hedging policy for the Company, we take numerous parameters into consideration including: The Company's overall risk management policy, the Board's sensitivity to risks, the importance of the cash flow exposure vis-à-vis the Company's accounting, the degree of reliance on forecasts etc.
The Company's goal in hedging exposures is to maintain its stability / budget contours / financial statements results by reducing the exposure to fluctuations in exchange rates, interest rates and commodities.
In determining the hedge policy, we define the company's risk appetite statement, that is, the overall risk level that the company is willing to take upon itself. On top of that, we will tailor both the best hedging strategies for the company and the flexibility level in managing these strategies
Managing and Monitoring financial risks
Financial risk management covers all of the steps that a company must take to protect itself against financial risks, including credit risks, market risks, and currency risks. As with general risk management, we at Protective routinely monitor and manage financial transactions, prepare varied sensitivity analyses as per the customer’s request, and work with the company’s financial managers to quantify the risk definition, measurement and methods for reducing risk.
Routine hedging foreign currency, interest and commodity risks
Hedging financial exposures is a proactive action that a company takes to neutralize the risk of fluctuations in foreign currency interest rates and commodities. A company usually faces two principle exposures: accounting exposure and cash flow exposure.
We provide you with the correct hedging to suit the needs of your company based the types of exposures you face, and according to the company’s business, environmental, and financial variables.
The appropriate hedging strategy for hedging currency exposure is determined by weighting a variety of factors, including:
The nature and activity of the company
Market conditions for the specific currency and/or asset
The environmental market conditions in which the company operates
Periodic changes in the various markets
Hedging currency exposures is usually very important for a company because of their fluctuations, and because the exposure amounts are sometimes quite large.
Hedging interest exposure
Hedging exposure to changes in interest rates can be implemented using several financial instruments. Matching the appropriate financial instrument is based on the individual exposure of each company, and according to its needs.