Large corporate clients will typically maintain rather complex cash pools to manage their business cash flows. Cash pools consist of multiple pool compartments denominated in different currencies and are being kept to avoid currency transactions wherever possible. National subsidiaries operate one compartment denominated in the local currency applicable to them, settle their "collections" - their revenues - in their currency with their compartment and pay all local costs from it, as well. The idea driving a pooling structures is the one of maintaining a "portfolio of currencies". Expectations are:
- Currency risk can be mitigated on cash flow level as operational costs can be paid from collections in one and the same currency with no currency transactions required at all. Usually, multinationals refer to this process as a "natural hedge";
- As currencies only appreciate and depreciate against other currencies, the pool with its different currency compartments can be considered as being a portfolio where gains and losses from currencies will net out.
Although the second idea is intriguing, practically it is rarely effective. One the one hand, building natural hedges is a long-term effort, as they typically involve business relations to be setup in the region where the revenue is made. On the other hand, as the effectiveness of a hedge is almost solely dictated by the hedge ratio, i.e. the size of the hedge, natural hedges almost never have the right size because of the long-term nature. As an effect, there are always monies to be paid which cannot be covered by the respective pool compartment. They either will have to be transferred from other compartments requiring a currency transaction, or, in certain compartments, there is excess liquidity available which could be used to finance business activities in other currencies, again requiring currency transactions.
Consequently, the portfolio approach does not really perform well, as netting effects only materialize if all individual pool compartments are of equal size, meaning that all regional businesses are of roughly equal size, which is a not very realistic assumption.
The Solution: RisqLabs Integrated Currency Risk Management
RisqLabs' Integrated Currency Risk Management ICRM aims at the task to protect a multinational firm against adverse moves in currency exchange rates.
RisqLabs' Integrated Currency Risk Management ICRM, in the age of Industry 4.0, removes the separated views of revenues and costs of a multinational company, correlated resources, and the market for foreign currencies and allows for effective hedging in quasi real-time for the first time. Core assets for RisqLabs' Integrated Currency Risk Management are its mathematic models that and its algorithms and technologies with which they are implemented or more precisely: its artificial intelligence components that acquire external and internal risk-relevant data, fuse them into a holistic market picture and compute an optimal hedge strategy, adjusting it on a daily basis.
RisqLabs ICRM Overview
Reducing exchange rate risks, saving revenues and profit margin, and raising company value.
Managing an coordinating cash pools of multinational companies with exchange rate risks more efficiently with Industry 4.0, the "Internet of Things". In lieu of hedging risk through inflexible, time- and date-limited financial products, ICRM algorithmically manages currency risk, considering both operative characteristics of a company and market factors and, hence, computes the enterprise’s exchange rate risks in real-time. The hedge strategy is calculated by an adaptive, mathematically optimal strategy.
- Increased transparency
- Lower cost
- Higher flexibility