Accounting Best Practices, Fifth Edition

11–22. Centralize Foreign Exchange Management

A company that has multiple divisions conducting business with other countries may be spending too much money hedging its foreign exchange risk. Each division will hedge its exposure without regard to the exchange positions of the other divisions, which may result in excess hedging costs. The reason for the excess costs is that one division may have a large account receivable that is payable in (for example) British pounds, while another division may have a payable in British pounds. Each one may pay to hedge the risk on pounds, when in reality, from the perspective of the entire company, the receivable and payable positions of the two divisions offset each other. Only the difference between the two positions needs to be hedged, which is less expensive.

Another problem is that there are intercompany payments between subsidiaries located in different countries; these transactions should be netted to arrive at the minimum possible flow of foreign exchange.

To take advantage of these offsetting positions, a company needs to centralize its foreign exchange management in one place, so that a coordinated effort to net out all exchange risks can be created. This is not just a matter of moving all of the foreign exchange people from outlying locations into one building, but also (and much more importantly) a matter of channeling the flow of foreign exchange information from all divisions into a single location. This may call for customized ...