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Managing multiple currencies and hedging the related risks

David Chappell
Oct 27, 2021 5:37:35 PM

Any TMC, OTA or Tour Operators doing business in multiple markets, or whose customers do, will likely run into dealing with foreign currency at some point.

 

Use cases may be that a TMC will have to bill a customer in a different currency, or an OTA issues a commission invoice to a supplier in a different currency. Perhaps a tour operator may have to purchase travel products in something other than its base currency. On the one hand this has an impact on the accounting process to handle FX, whilst on the other the company will have to manage currency risks associated with rates of exchange. 
 
With release 15.5, our customers will be able to manage multi-currency transactions in both the processing of orders and fees or commission. Additionally, they will be in able to hedge currency when invoicing in other than their base currency. Hedging currency mitigates the exchange rate differences risk (day or spot rate vs charged) and is easily achieved with an additional % on either an imported or a manually defined currency rate.
 
MIDOCO already fetches foreign currency exchange rates on a daily basis from various sources, including the ECB. Multiple sources means that MIDOCO Organisational Units trading in a base currency other than EUR will benefit from the live rates. Also, the exchange rates desired for converting transactions into your base currency can be set individually. Based on the most used currencies MIDOCO provides a default set containing: GBP, USD, AUD, NZD, ZAR, CHF, SEK, DKK & CZK.
 
The new Hedging function in MIDOCO applies to all FX rates no matter if set up manually or retrieved via one of the feeds. The validity during which to apply a specific hedging can also be defined individually in system. MIDOCO also automatically terminates an existing hedged rate when you enter a new hedging setup for the same conversion.
 
Example: You set up hedging for GBP to USD for 1 Aug 2021 - 1 Dec 2021. Now you want to change that hedging for a new one for GBP to USD starting on 1 Sep 2021. On entering the new hedging rate starting on 1 Sep 2021, MIDOCO automatically amends the existing hedging to be valid from 1 Aug 2021 to 31 Aug 2021.
 
Hedging setup applies to all Units in MIDOCO which share the same configuration databases, meaning you can apply to changes across many units at once. You are also able to apply different hedging for Sell, Average and Buy rates in MICOCO for the currency conversion in question.
 
Let us illustrate the functionality using an example:
Your base currency for this example is GBP. MIDOCO retrieves the following rates automatically and stores them in your Exchange Rate Table for GBP to USD. So these rates are going to be used when you sell a service in USD:
 
  • 1 Sep - 7 Sep 2021: 1.383940
  • 8 Sep - 14 Sep 2021: 1.383010
  • 15 Sep - 21 Sep 2021: 1.386170
  • 22 Sep - 30 Sep 2021: 1.361450
You set up a hedging rate of +1.5% for GBP to USD for the period 1 Sep - 30 Sep 2021. This will make the system apply +1.5% to the received rate. The hedging setup now results in the following applicable exchange rates for e.g. orders/items, supplier settlement, bank statement handling, cash book etc.
 
  • 1 Sep - 7 Sep 2021: 1.404699
  • 8 Sep - 14 Sep 2021:1.403755
  • 15 Sep - 21 Sep 2021: 1.406963
  • 22 Sep - 30 Sep 2021: 1.381872
Next, an order is created on 14.09.2021 where there is a base currency sales price of £1,000.00, but is sold to USD customer. The USD sales price is calculated using the applicable exchange rate for that day incl. the hedging rate of 1.5%: 1.403755
 
So the price the USD customer sees is:
£1,000.00 * 1.403755 = $1,403.76
 
You can enter the hedging percentage for the buy side as well (so USD to GBP for when you buy items in USD). Here too the hedging setup can have a validity period, either of a specific time frame (x to y) or ad infinitum (defined by an end date of something far in the future.. say 31 Dec 2199!).
 
So, if there is a new hedge rate that is meant to be valid from 1 Jan 2022 onwards simply enter the new hedge rate giving it the valid from as 1 Jan 2022 and a valid to a date in the near or far future. MIDOCO will in any event automatically terminate the existing hedge rate as soon as a new matching rate and validity is entered. Consequently, you do not have to amend the existing hedge rate's expiry date, MIDOCO will do that for you.
 
This way it means there can only be one valid hedge rate for a given currency conversion (e.g. GBP to USD) for a given point in time - critical for having an effective FX calculation!
 
Mitigating FX risk within a business is a critical part of keeping an eye on the bottom line. MIDOCO's latest functionality enables you to do that in a seamless and controlled way, perfect for the modern, multi-market, multi currency agency.

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