Currency Pulse #31 — Journeys to Treasury

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Released during the EuroFinance meeting in Copenhagen, the 9th edition of Journeys to Treasury, presented by Fran?ois Masquelier, contains an impressive amount of information (*). Here are some of our FX-related takeaways:

1. Airbus. "We are mainly exposed to euro-dollar risk", says Airbus’ Senior FX risk dealer Pierre Paul Norais. The massive $90bn hedging portfolio is negotiated with 35+ banks. Although the focus is on credit risk, we’re curious about how managers handle the USD forward discount to EUR.
2. Goal clarity. When assessing what treasury technology is best suited to a given business, SAP's Arif Esa stresses "the importance of goal clarity". This is spot on. All too often, FX 'vendors' push one-size-fits-all solutions that fail to take account of firms' pricing parameters and goals.
3. GenAI and forecasts. PwC's Didier Vandenhaute presents a case of 97% accuracy in cash flow forecasting with GenAI. The most interesting part is that few internal stakeholders are involved, rather than the accuracy itself. At Kantox, we think that FX automation handles this last problem well.?
4. GenAI and counterparty risk. It is argued that "AI analysis would have picked up" negative social media chatter during the 2023 banking crisis—when credit ratings did not bulge. This is one illustration of the possible GenAI applications in treasury operations outlined in the report.?

“AI is obviously a current hot topic for discussion, and this guide outlines the most promising use cases, what generative AI actually is. This is uncharted territory for many.” — Fran?ois Masquelier

(*) BNP Paribas, EACT - European Association of Corporate Treasurers, PwC and SAP: "Journeys to Treasury", No. 9, 2024.

Layered Hedging, Part II: Avoid pitfalls

Before tackling the nuts and bolts of an effective FX layered hedging program in our next instalment, this second blog of the series clarifies the most common misconceptions and/or suboptimal practices. These include:?

• Confusing layered hedging and rolling hedging

• Disregarding constraints faced by treasurers

• Lacking the necessary flexibility to react to FX markets

Read the entire blog ?? here.

Job Board: more Commercial Team positions

Kantox keeps looking for top candidates to join the team. Michael Schimmel, Chief Commercial Officer, needs talented professionals to strengthen the Commercial Team as the company expands into new markets. There are more than 30 positions to be filled.?

Here are some positions waiting for the right candidate (*):?

• Account Executive, Benelux ???? ???? ????
• Account Executive, Travel Industry
• Business Development Representative, DACH ???? ????????
• Customer Success Manager, Spain ????

(*) All positions are posted on the Kantox LinkedIn page.

Data quality and exposure tracking

Released during the EuroFinance meeting in Copenhagen, a revealing poll helps concentrate minds on the importance of data quality and exposure tracking when managing FX risk, as 69% of respondents see it as their main concern.

How does Currency Management Automation deal with these concerns? By following a detailed workflow for Exposure Collection and Exposure Processing, each with its own set of sub-processes, as shown in the illustration above.

Stay tuned—we’ll be talking and writing a lot about this issue in the coming weeks and months.

Pricing managers on the rise

In the Pricing Newsletter, Dr. Hans-Christian Riekhof discusses current trends in pricing at medium and large companies. While there are some gaps in the analysis, we welcome the emphasis on ‘pricing managers’ (*).

At Kantox, we hold the view that pricing is a key determinant of the type of FX hedging programs firms need to consider. Here are Dr. Riekhof’s main points:?

1. Pricing managers are on the rise. More companies are establishing a pricing department or hiring a pricing manager.?
2. Lack of pricing strategies. Many companies lack a formulated and approved pricing strategy at the group level.?
3. Insufficient reporting. As much as 60% of companies do not measure deviations between price specifications and realised prices.

(*) Surprisingly, FX automated pricing solutions are absent from the picture. Yet, they provide a formidable tool for managers to price with the required FX rate —spot or forward—, with markups per client segment and currency pair.

Book review. How to become a cyborg

. Ethan Mollick. Co-Intelligence. Living and Working with AI. Penguin, 2024, 234 pages.?

In this best-selling and at times stunning book, Wharton School’s Ethan Mollick boldly predicts that people involved in productive activities —like you and me— will become Cyborgs of sorts, routinely using Large Language Models (LLMs) like GPT-4.

Mr. Mollick is not a software engineer himself. This explains the book’s emphasis on training and task automation. All the same, there is valuable information on technical terms like pre-training, Frontier LLMs and the all-important ‘weights’—of which the original ChatGPT had no fewer than 175 billion.?

“LLMs work by predicting the most likely word to follow the prompt based on statistical patterns. LLMs are connection machines trained by generating relationships that may seem unrelated to humans” — Ethan Mollick

The Wharton professor takes a mostly optimistic viewpoint as he shares his experiments with AI. While financial risk management lies outside the scope of the book, the author cites a University of Chicago experiment where ChatGPT “outperforms more specialised models” when analysing financial risks.

Mr Mollick’s key point: your most productive workers will “blend machine and person” by working in co-intelligence alongside LLM models that are set to become much more powerful. But they will also need to manage the inherent risks of laziness, boredom and cheating.?

Five useful links

1. McKinsey on Travel. A Skift + McKinsey report on “The Evolving Travel Experience” shows that 52 % of Gen Zers say they splurge on experiences, compared with only 29% of baby boomers. Platforms can also lower payment and communication hurdles for a traveller, particularly when operators transact in foreign currencies.
2. GBP ups and downs. A Financial Times article singles out GBP as "the best performing of the G10 group of most heavily traded currencies". The article cites a $1.40 forecast for GBP-USD. Having derided GBP as the British peso in 2022, forecasters now see it as the best performer in 2024. What's the point? Here’s Kantox’s view: "Keep calm and automate”.
3. Korea's reliance on China. A report by the Export-Import Bank of Korea shows that chipmakers’ reliance on raw materials imported from China deepened in 2023, as "Chinese materials remain cost-competitive". The country relies on Chinese imports for 5 out of 6 key raw materials for semiconductors.
4. Central Bank Digital Currencies. The Reserve Bank of Australia is endorsing a wholesale —rather than retail— CBDC. Its benefits to the economy are seen as more promising, and the challenges less problematic compared to a retail version. It's "more evolution than revolution". Central banks are growing increasingly cautious about CBDCs.
5. Exchange Traded Funds. Bloomberg notes that ETFs have just surpassed the $10 trillion mark in assets under management. Lessons for FX risk managers: (1) Avoid timing the market (about 93% of ETFs are passive replicators); (2) Achieve operational brilliance with automation; (3) Implement scalable solutions.

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