Risk-cost analysis of currency exposure reduction for currency exposure management

Methods and apparatuses enable companies to analyze potential foreign currency exposure reduction actions. Value-at-risk (VaR) for currency exposures and cost of potential exposure reduction actions are used to order currency exposures representing foreign currency exposure for a company. Currency exposures associated with negative cost actions are ordered based on a ratio of VaR to cost. Currency exposure associated with positive cost actions can also be ordered, either based on VaR or cost. An output representation of the VaR versus accumulated cost is generated from the ordered currency exposures. Additionally, a graphical representation of VaR versus accumulated cost can be generated from plot points based on the ordered currency exposures. The output representation, whether a table, list, or graph, allows comparing potential exposure reduction actions.

FIELD

Embodiments of the invention relate to foreign currency exposure reduction, and more particularly to computation and analysis of foreign currency exposure reduction actions based on value-at-risk (VaR) and cost associated with foreign currency exposure reduction actions.

Portions of the disclosure of this patent document may contain material that is subject to copyright protection. The copyright owner has no objection to the reproduction by anyone of the patent document or the patent disclosure as it appears in the Patent and Trademark Office patent file or records, but otherwise reserves all copyright rights whatsoever. The copyright notice applies to all data as described below, and in the accompanying drawings hereto, as well as to any software described below: Copyright © 2010, RimTec Inc., All Rights Reserved.

BACKGROUND

Companies make investment and operation decisions each day as they carry out their business. As companies expand internationally, they will most likely enter into business transactions that are denominated in a foreign currency, or a currency that is different than that of the company. The value of these foreign currency denominated business transactions changes in relationship to the currency of the parent company (or the owning subsidiary) each day they are outstanding, given that the exchange rate between the two currencies (transaction currency and company/subsidiary currency) changes 24 hours per day with the movement of the inter-bank foreign currency market. Thus, a company may realize an economic loss or economic gain based solely on the movement in the foreign currency market between the date of purchase/sale and date of payment/collection or conversion.

The potential loss or gain realized by movement in the foreign currency market results in an uncertainty or a risk that most companies would like to manage to the extent possible. However, the risk or uncertainty increases as a company expands further internationally, and increases the number and amount of foreign currency exposure relationships.

As the amount of the foreign currency exposure increases, companies assess whether they are comfortable with the exposure. If they are not comfortable, they generally begin to implement foreign currency risk management programs aimed at reducing the exposure. Exposure reduction may be accomplished by currency conversion or the use of foreign currency derivative instruments. For example, a company may enter into hedges by purchasing foreign currency forward contracts or foreign currency option contracts. A hedge reduces the risk of economic loss associated with a foreign currency exposure.

However, many exposure reduction actions may have an associated cost to perform the action (e.g., a net cost to enter a hedge contract). Additionally, the risk of a currency exposure is not necessarily equal across currencies; rather, risk associated with currency exposure can vary significantly based on volatility in the foreign currency inter-bank market associated with the currencies of the exposure. For example, the risk inherent in EUR-USD may be 12.3% while the risk inherent in USD-HKI) may be less than 0.5% (because HKI) is tied to or pegged to USD). The inherent risk is represented by a volatility factor that indicates how likely it is that a change in the exchange rate between the currencies will happen. Thus, the volatility associated with a currency exposure may be represented with a value-at-risk (VaR) methodology or other methodologies known in the art.

A company may not be able to perform all actions necessary to reduce foreign currency exposure, and performing all actions may not be necessary to bring foreign currency exposure within a tolerable risk for the company. However, it is difficult to determine what actions are “better” to perform than other actions, or which actions may be worth the cost of performing. Presently there are no tools to allow evaluation of foreign currency exposure reduction actions, especially to evaluate how each potential reduction action may compare to other possible actions, in a way that would allow a user to determine what actions would be preferred, or choosing to perform one action over another.

Descriptions of certain details and implementations follow, including a description of the FIGS., which may depict some or all of the embodiments described below, as well as discussing other potential embodiments or implementations of the inventive concepts presented herein. An overview of embodiments of the invention is provided below, followed by a more detailed description with reference to the drawings.

DETAILED DESCRIPTION

As described herein, foreign currency exposure reduction analysis is provided. Value-at-risk (VaR) for currency exposures and cost of potential exposure reduction actions are used to order currency exposure representing foreign currency exposure for a company. Currency exposures associated with negative cost actions are ordered based on a ratio of VaR to cost. Currency exposure associated with positive cost actions can also be ordered, either based on VaR or cost. An output representation including accumulated VaR and cost is provided based on the ordering and on computed VaR and cost values. In one embodiment, a graphical representation of cumulative remaining VaR versus accumulated cost is generated from plot points based on the ordered currency exposures. The output representation allows comparing potential exposure reduction actions.

As used herein, foreign currency exposure, currency exposure, or simply exposure, refers to a relationship between a transaction currency and a reference currency. The transaction currency is a currency in which actual transactions that have occurred are designated, or a currency designation for transactions forecasted to occur. The reference currency could be a reporting currency, functional currency, or other designated or company-defined reference currency.

An exposure reducing action or an exposure reduction action refers to an action taken to reduce the exposure defined above. An exposure reducing action may be a hedge. A derivative instrument refers to the form of an exposure reducing action or hedge. Examples of derivative instruments include foreign currency forward contracts, option contracts, and other instruments available from the currency or financial market or markets. As used generally herein, each exposure reducing action or hedge will reduce the VaR associated with an exposure to “0”. Thus, VaR reduction refers to the implementing of an exposure reduction action. Each derivative instrument, depending on the type selected, has an associated cost, which can include interest differential, premiums, or other market generated costs.

As suggested above, the risk of foreign currency exposure increases as a company increases its international expansion (e.g., doing business in a country with a currency different than the currency of its country of origin). As an example, assume a US company sells its product to a European customer, denominating the sale in euros (EUR) and giving the customer 60 day payment terms. For purposes of this example, consider the invoice to be EUR 1 million. If at the time of the sale, the EUR-USD exchange rate was 1.4500, the USD value of the account receivable was USD 1,450,000.

However, as the EUR-USD exchange rate changes daily, the USD value of the account receivable changes until such time as the EUR is collected and exchanged into USD. Assume that the EUR 1 million was collected 60 days later, the EUR converted to USD upon receipt and the exchange rate for the conversion was 1.3500 based upon the inter-bank market rate at the time of the conversion. The company would realize an economic loss of USD 100,000 given the movement in the foreign currency market between the date of sale and date of collection/conversion.

Currently, companies make the decision to hedge (e.g., purchase a derivative instrument) based upon an amount of the foreign currency exposure (e.g., EUR 1 million in the example above). The larger values of exposure tend to receive more attention. Thus, extending the above example to have a USD amount of exposure of USD 1.75 million versus the USD 1.45 million of the above example, currently companies tend to address the exposure of USD 1.75 million first. However, analysis of each exposure reveals other properties related to both the exposure and a hypothetical hedge of the exposure that can be utilized to provide a framework for making exposure reduction or hedging decisions.

A first property includes the risk of loss associated with each foreign currency exposure. The risk of loss associated with each foreign currency is different given the volatility in the foreign currency inter-bank market associated with the currencies of the exposure. For example, the risk inherent in EUR-USD may be 12.3% while the risk inherent in USD-HKD may be less than 0.5%. The typical approach to measuring this risk includes techniques like value-at-risk and other methodologies known in the art.

A second property includes the cost to hedge exposures with derivative instruments such as foreign currency forward contracts, option contracts, or other instruments. The cost differs for each of the currency relationships. For example, a component of the price of a forward currency forward contract or of an options contract is the forward points or interest differential. The interest differential is a calculated pricing adjustment based upon a comparison of the interest rates of the countries of the currency relationship over the duration of the forward contract (e.g., a yield curve comparison for the two currencies), and an understanding of the currencies that will be purchased and sold with the forward contract. For example, hedging an AUD-USD exposure may generate 1% in interest income over the duration, while hedging a USD-BRL exposure may cost 1.75% over the duration.

Thus, closer evaluation of the costs associated with hypothetical exposure reduction actions, such as a foreign currency forward contract, reveals that some actions may result in a net income while at the same time reducing foreign currency exposure.

Accordingly, as provided herein, hedging decisions for multiple foreign currency exposures can be informed through the use of information not currently used for decision analysis.

The analysis includes generating hypothetical hedging decisions, and using one or more factors including value-at-risk (VaR), foreign currency interest differential (and potentially overhead cost of an instrument), collectively referred to as exposure reduction cost, and/or a calculated risk-cost factor in making decisions. Currency exposures are ordered based on one or more of the factors, and the information presented in a way to allow comparison of one action to another. One or more actions can then be taken to reduce the overall portfolio risk associated with the foreign currency exposures to a level that is acceptable given foreign currency risk policy constraints or the company's risk tolerance levels.

The analysis results in the generation of an output representation, which may take the form of a structured list, a table, a graph, or some other representation. A structured list includes similar fields with ordered currency exposures to indicate similar information (such as VaR-based and cost-based information) to compare one potential action to another. A table is similar to a structured list, with rows and columns as the structured fields. Additional computed information can be appended or inserted into a representation of the currency exposure. Thus, computed values can be generated and associated with a currency exposure.

In one embodiment, the analysis can result in the generation of plot points representing cumulative risk reduction and cumulative cost (the accumulation of interest income and negative cost) associated with each exposure reduction decision. For a graph, the plot points are plotted on a chart or graph where one axis (e.g., the y-axis) represents remaining VaR after the exposure reduction action and the other axis (e.g., the x-axis) represents accumulated income or cost. The axes could be reversed. Connecting each of the points creates a graphical representation of the cost-risk relationships associated with specific potential actions. As the population of hedge decisions increases, the graphical representation takes the form of a curve.

FIG. 1is a block diagram of an embodiment of a system with a currency exposure reduction analysis engine. System100represents a system for providing foreign currency exposure analysis. The analysis engine could refer to the entirety of components that calculate the various aspects of the currency exposure reduction analysis, or it could refer to the elements of the exposure analysis server that perform the calculations. System100includes exposure analysis server120, which represents various components of hardware and/or software to provide a currency exposure reduction analysis according to any embodiment described herein.

Exposure analysis server120receives or accesses currency exposure data110. Currency exposure data110can include transaction data112or forecast data114. Transaction data112includes data related to transactions already performed. Transaction data112refers to data from a general ledger or ERP (enterprise resource planning) system data or other business system data. Forecast data114refers to data related to prospective transactions, or transactions or currency exposure data predicted to occur. Such forecast data may be used, for example, to make estimates for a company for accounting purposes.

Exposure analysis server120includes exposure reduction analyzer130. Analyzer130receives or accesses currency exposure data110for analysis. Currency exposure data110is also provided to exposure reduction action generator122. Generator122generates hypothetical exposure reduction actions for use in exposure reduction analysis. Each hypothetical exposure reduction action is an action that eliminates (i.e., reduces to zero) a particular currency exposure.

Generating the hypothetical exposure reduction action can include generating a hypothetical hedge for an identified currency exposure. Generating the hypothetical exposure reduction action can include generating one or more hypothetical forward contracts, option contracts, or other derivative instruments for an identified currency exposure. The hedge or derivative instruments can be generated from stored information or from information obtained over a network. Thus, for example, the hypothetical exposure reduction action can be created from information that defines how to calculate or create a derivative instrument for a particular provider, or could be a quote (e.g., a real time quote) from a provider.

Different methods can be used for different currency exposures. For example, an offer may be known in the system for a particular currency exposure, which could be used to generate a hypothetical action for that currency exposure, while the hypothetical action can be calculated and/or obtained for another currency exposure (as represented by another currency exposure pair). The analysis of what actions to take to reduce currency exposure is thus based on real and/or simulated actions. Although “real” actions may be used in the sense that such real actions may be essentially immediately available, it will be understood that all currency exposure reduction actions are referred to as “hypothetical” for purposes of analysis, because for purposes of analysis it is assumed that an action is being evaluated to determine whether it should be executed. Until the action is acted upon, it is hypothetical for purposes herein.

Each currency exposure has an associated VaR. (value-at-risk) associated with the volatility of the exchange rate between the two currencies of the exposure. Each hypothetical currency exposure reduction action has an associated cost (C). The cost can be positive (i.e., a net positive income for the company) or negative (a net negative cost) to eliminate the exposure with the hypothetical action. VaR data132and cost data134are received into exposure reduction analyzer130to enable analysis. As suggested above, the source of VaR data132and/or cost data134may be local to server120, or external (separate from) server120. Similarly, exposure reduction action generator122may be part of server120, or may be separate from server120. Thus, none of these is shown completely within the box representing server120.

To reiterate, VaR can be obtained by accessing a stored VaR value for one or more of the identified currency exposures, or the VaR can be computed. Computing the VaR may include, for each currency exposure for which VaR is being calculated, summing all data having a common currency pair indicator, and multiplying the sum by an associated risk factor (volatility factor) for the currency pair. Cost can be obtained by accessing a quoted cost value, and/or computing the cost.

Exposure reduction analyzer130performs calculations related to the analysis of the hypothetical currency exposure actions. In particular, exposure reduction analyzer130performs a sorting of the currency exposures. Multiple different techniques can be applied to currency exposure data110to sort it. In one embodiment, the hypothetical exposure reduction actions are identified for each currency exposure as having a net positive cost or having a net negative cost, and sorted based in part on whether they are positive or negative. In one embodiment, currency exposures with net negative cost are sorted differently than those with net positive costs.

Assume the total number of currency exposures is represented by N+M, where a number N of currency exposures have an associated hypothetical exposure reduction action with a net negative cost, and a number M of currency exposures have an associated hypothetical exposure reduction action with a net positive cost. The N negative-cost currency exposures are sorted based on a factor or a ratio described in more detail below. The M positive-cost currency exposures are sorted based on either VaR or cost (C). In some scenarios, M may be zero, which would result in all currency exposures being soiled based on the factor or ratio.

For the number N of currency exposures, exposure reduction analyzer130computes an associated ratio of VaR to C for each currency exposure. In one embodiment, the currency exposures are ordered by exposure reduction analyzer130in order of highest absolute value ratio to lowest, or largest negative to smallest negative value. Such an ordering indicates the largest currency exposure reduction per unit cost. Thus, assuming two ratios, one being −2.0, and another being −1.5, the currency exposure associated with the ratio −2.0 would be ordered higher than the currency exposure associated with the ratio −1.5. The ratio −2.0 indicates that for every dollar spent (C), currency exposure is reduced by two dollars (VaR) (versus one and one half dollars reduction per dollar spent for the −1.5 ratio). Thus, the ratio of VaR to C indicates a “most efficient reduction rate.” Accordingly, negative-cost currency exposures can be ordered 1 through N based on their associated ratios from largest negative to smallest negative.

For the negative-cost currency exposures, the ratio can be represented as:

VaRC,(1)
where each associated ratio indicates risk reduction per cost for the exposure reduction action.

For the number M currency exposures having an associated hypothetical exposure reduction action with a net positive cost (positive-cost currency exposures), the currency exposures may be ordered based on C (from highest to lowest net positive cost, or most income to least income) or based on VaR (from highest to lowest VaR, or most net exposure reduction to lowest).

It will be understood that ordering the positive-cost currency exposures by the ratio of VaR to C may or may not make sense. In the case that the VaR to C ratio is computed for the positive-cost exposure reduction actions, the ratio may indicate a net currency exposure reduction per dollar of income. Smaller ratios indicate less exposure reduction per dollar of income than higher ratios. However, while computing and reviewing the ratio may or may not provide an academic interest, from one perspective it has little to no practical value. The ratio of positive-cost currency exposures may have no practical value because a company would be benefited from performing all actions associated with all positive-cost currency exposures, and so determining which actions result in higher “efficiency” may be solely academic.

Thus, it is expected that while a VaR to C ratio could be computed for currency exposures identified as having a net positive C, there may not be any real practical reason to do so. Rather, either all actions associated with all positive-cost currency exposures will be performed, or the actions can be ordered based on highest income generating actions (in order of C), or based on most exposure reduction (in order of VaR), and selected on a policy preference of the company without needing to look at “efficiency.”

Exposure reduction analyzer130thus generates ordered exposures140. A representation of the ordering of the currency exposures is generated from the computed ordering. In one embodiment, output representation generator150is part of exposure reduction analyzer130, and is used to generate an output representation. For example, a table or list could be generated by output representation generator150to indicate the determined or computed ordering of currency exposures. In one embodiment, output representation generator150generates a graphical representation of the ordered exposures.

In one embodiment, information is generated for each currency exposure related to cumulative remaining VaR and cumulative cost based on an assumption that all previous exposure reduction actions in the ordered list have been taken. Thus, the first of the ordered currency exposures can include generated information to indicate what total VaR would be remaining after performing the hypothetical exposure reduction action associated with the first ordered currency exposure. Additionally, the first ordered currency exposure can include generated information to indicate a total cumulative cost would result after performing the hypothetical exposure reduction action associated with the first ordered currency exposure. The second ordered currency exposure would include cumulative remaining VaR and cumulative cost as adjusted from the values of the first ordered currency exposure by the hypothetical exposure reduction action associated with the second currency exposure. Such information can be generated and included with each currency exposure down the list to the last, when the VaR would be zero, and the cost would be the total cost associated with performing all hypothetical actions.

Mathematically, it can be said that for each currency exposure down the list, values for VaR and cost would be calculated as set forth in equations (2) and (3), respectively:

∑n=1N⁢VaRn;(2)∑n=1N⁢Cn.(3)
where N is the number of currency exposures being evaluated, and each nth currency exposure represents the next ordered currency exposure in the list.

While the representation of equation (3) indicates a cumulative cost, the cumulative remaining VaR may be generated in reference to a starting total VaR. It will be understood that “doing nothing,” or performing none of the exposure reduction actions results in a net zero cost. Thus, the sum of all costs is the cumulative cost. For VaR, there is a starting VaR, which can be reduced. A representation of cumulative VaR may then be presented as a total remaining VaR, indicated by:

(VaRTotal-∑n=1N⁢VaRn),(4)
where VaRTotalindicates the starting VaR.

It will be understood that another VaR-based value could be used and represented in the output. For example, the total VaR reduction represented by equation (2) may be indicated. In one embodiment, the cumulative values generated are to be used for a graphical representation, which can plot remaining VaR against cumulative cost. Such a graphical representation may be generated from plotting ordered pairs of the form:

It will be understood that the order may be reversed and plotted on opposite axes. A starting plot point for the graph would be some starting point (which would be the initial point of total VaR and starting C). In an embodiment where positive-cost currency exposures exist, the starting point for plotting the negative-cost currency exposures could be the last point of the positive-cost currency exposures, or the last of selected positive-cost currency exposures (assuming that some are left out for some reason). Subsequent plot points are generated per equation (5), and plotted. In words, each nth plot point is an ordered pair of the remaining VaR and cumulative cost. The remaining VaR is calculated by summing the total starting VaR and the VaR reduction of the nth currency exposure and the VaR reduction of all preceding currency exposures. Similarly, the cumulative cost is calculated by summing the starting C and the C of the nth currency exposure and the Cs of all preceding currency exposures. Those plot points can then be used to create a graphical representation of remaining value-at-risk versus accumulated cost to graphically compare potential exposure reduction actions.

When adding positive-cost currency exposures to the analysis, the above description is modified to include N negative-cost currency exposures and M positive-cost currency exposures. The M positive-cost currency exposures may be ordered based on C (e.g., from highest positive return to lowest positive return) or VaR (e.g., from highest VaR reduction to lowest VaR reduction).

Thus, as described above, exposure reduction analyzer130can calculate VaR using common VaR calculation techniques, calculate hypothetical interest generated or interest cost associated with a foreign currency forward contract or other instrument used to hedge a foreign currency exposure (e.g., the “cost”), and calculate a “Risk-Cost” factor by dividing the VaR by the hypothetical interest generated or interest cost. The currency exposures are ordered based on one or more of these parameters. Ordering based on VaR compares hedge decisions based on producing the maximum reduction in VaR. Ordering based on cost indicates which hedge decisions produce the most interest income and which cost the most interest expense. Ordering based on the Risk-Cost factor generates an ordering based on efficiency of VaR reduction per cost per hedge decision. The parameters may be used in combination, ordering in different ways, and providing output representations based on the different parameters to serve as a comparison and selection guide.

Exposure analysis server120includes various hardware resources, namely, processor102, memory104, and storage106. Processor102represents one or more processors, which may be discrete devices, multi-core processors, central processing units (CPUs), microprocessors, microcontrollers, etc. Processor102enables exposure analysis server120to perform processing and/or analysis. Storage106provides non-volatile storage of data and instructions. Memory104represents any type of memory that provides temporary storage of data and instructions. Memory104may include any type of random access memory (RAM), as well as read-only memory (ROM), or Flash. Thus, memory104may be a volatile or non-volatile memory device (i.e., it may or may not lose state when power is interrupted to the memory device). In certain computing devices, memory104and storage106may be the same device, or partitions of the same device.

In one embodiment, processor102, memory104, and storage106are resources associated with a hosted server. In one embodiment, currency exposure data is received over a network at exposure analysis server120, which provides the data analysis services described. Such a server can include a hosted ASP (application service provider) environment, such as an application environment hosted via services over a network (such as the Internet). Exposure analysis server120could thus be executed in a hosted ASP server and receive input data from a company or organization to perform analysis. Alternatively, exposure analysis server120could be executed locally to the organization or company for which currency exposure data110is provided.

In one embodiment, transaction data112includes transaction data from the company “books,” referring to the general ledger data. Such transaction data includes various records, each representing a business transaction. The transaction data may include a value of each transaction denominated in a currency associated with the transaction. This currency may be different from a reference currency that the company uses for account purposes or for risk management purposes (i.e., the “reporting” currency, or the currency in which the company normally reports its financial data; the “functional” currency, or the currency of one of the company's subsidiaries). Thus each transaction has an associated structured electronic currency exposure representation for the currency pair of the transaction currency and the reference currency.

The structured currency exposure representation includes a currency pair indicator, an obtained value, and a derived value, and has an associated exchange relationship between the two currencies of the currency pair indicator.

The currency pair indicator identifies a currency exposure between a first currency (the transaction currency, or the currency in which the transaction is denominated), and a second currency (the reference currency). Significantly, unlike simply searching rows of data for columns or fields having the currencies, the structured currency exposure representation is created as a manipulable entity within the system. The currency exposure representation is agnostic to order of the currencies. Thus, the currency exposure representation is the same for all transactions having the same two currencies, where the transaction currency is one of the first or second currencies, and the reference currency is the other of the two.

Thus, all common exposure can be considered together by establishing the currency exposure representation that structures the currency exposure relationship. As such, each currency pair indicator is unique to a particular currency exposure type, whether in the first currency with respect to the second currency, or in the second currency with respect to the first currency (e.g., one currency is the transaction currency, and the other is the reference currency). In one embodiment, the currency exposure representations are identified by an ordered pair. The first and second currencies related by an exchange rate, which allows one value to be derived from the other.

The obtained value is a value in the currency exposure representation that is obtained from the value of the transaction denominated in the transaction data. The derived value is not in the transaction data; rather, the value of the derived value is obtained by calculating a numeric equivalent of the obtained value in the second currency based on the exchange rate. Thus, the currency exposure representation is an entity within the system that is created from obtaining certain data from the transaction data, deriving other data based on a relationship between the fields (i.e., the exchange rate), and is then a structured entity that can be used to perform exposure calculations.

The number of currency exposures within the transaction data is identifiable as the number of unique currency exposure pairs or currency exposure pair indicators.

FIG. 2Ais an embodiment of an example of foreign currency exposure and hypothetical exposure reduction action data, including analytics data. Currency pair (curr pair)210indicates unique currency pairs identified from obtained or received currency exposure data. Exposure220illustrates information related to the currency exposure. Hedge230illustrates a hypothetical exposure reduction action to offset the exposure.

In the illustrated data, it will be understood that each currency exposure may include multiple transactions. Each individual transaction can be represented by a structured representation as described above, with obtained data and derived data. The sum of all structured transaction representations having a common currency pair (e.g., shown in currency pair210) is the currency exposure identified by currency pair210, and whose total values are shown in exposure data220.

Exposure data220includes a first currency (CURR1)222and a second currency (CURR2)224. It will be understood that USD is the reference currency in the examples, and is common throughout all currency pairs210. First currency222and second currency224are related by a currency exchange rate, shown in FX/RT (exchange rate)244. Exposure data220also includes VaR226, which is the absolute value of the value-at-risk in the reference currency (USD). VaR226is obtained by taking the absolute value of the multiplication of the reference currency times the volatility factor (V/F)242. Thus, the VaR for USD-CNY is |(2,237,303)*0.01|= 22,373. It will be observed that the reference currency is first currency222for USD-CNY, but is second currency224for EUR-USD. Thus, for EUR-USD, the VaR is |(12,470,625)*0.133|=1,658,593. Volatility factor242is typically obtained from a market source that makes such information available.

Hedge data230illustrates the inverse of the values of exposure data220, given that the hypothetical reduction action is to eliminate the exposure. Thus, first currency (CURR1)232is the same absolute value of first currency222, but a different sign. The same is true of second currency (CURR2)234with respect to second currency224. Cost236is illustrated as an interest rate differential computed by interest rate differential factor246. Cost236is calculated based on the absolute value of the reference currency. The cost as illustrated is computed based on a base factor of 0.365%, and is obtained by calculating the value of the reference currency times the base factor, minus the value of the reference currency times the interest rate, all divided by 12. Mathematically, cost 236 as illustrated can be calculated by:

(CurrRef*0.00365)-(CurrRef*IntRate)12.(6)
where CurrRefis the reference currency (either first currency232or second currency234), and IntRate is the interest rate (from column246) for the currency pair.

The illustrated cost is meant only as an example to show that a cost is associated with performing an exposure reduction action, but the specific form or method to determine the cost should not be understood as representative or limiting. Additionally, the represented volatility factors242, exchange rates244, and interest rates (and associated cost calculations) are assumed constant for purposes of simplicity throughout all ofFIGS. 2A through 5B. Again, the purpose of holding these values constant is for purposes of simplicity in illustration and description, and is in no way representative or limiting.

FIG. 2Bis an embodiment of an example of foreign currency exposure and hypothetical exposure reduction action data, including cumulative cost and VaR in the analytics data. In one embodiment, a VaR to Cost ratio or factor (V/C276—the far right column of the drawing) is computed for each currency pair, and currency pairs ordered280based on the computed ratio. It will be observed that certain currency pairs280have an associated positive cost266, while others have an associated negative cost. For purposes of description, they will be referred to, respectively, as positive-cost currency pairs or currency exposures, and negative-cost currency pairs or currency exposures.

As illustrated, one implementation of an ordering algorithm orders the currency exposures by “growing” ratio276(i.e., moving from left to right on a hypothetical number line), and treats positive-cost exposures separately from negative-cost exposures. Thus, the positive-cost exposures are ordered from the smallest ratio to the largest ratio, and the negative-cost exposures are ordered from the most negative to the least negative ratio, as seen in V/C column276.

Also introduced is the concept of cumulative data270. Cumulative data270is illustrated with two values: cost272and VaR274. Cumulative cost272, or accumulated cost, is a running total of all associated costs266, assuming all exposure reduction actions represented by hedge260are performed. Thus, cost272starts at zero (no action means no cost), grows to 274 for the cost of the USD-HKD hedge, to 7825 (274+7552) by adding the cost of the USD-PHP hedge, to 8955 (7825+1129) by adding the cost of the USD-CNY hedge, and so forth.

There is a cross-over point or inflection point between the USD-SGD currency exposure and the EUR-USD currency exposure. The inflection occurs due to the transition from positive-cost exposures to negative-cost exposures. After this point, the summed cost value subtracts from the earned income cost. However, it will be understood that for the data shown, a company could perform all exposure reduction actions up through the AUD-USD hedge without having to pay out any money, while still reducing VaR. Not until the last hedge is performed for USD-MXN does the cumulative cost272become net negative.

Cumulative data270includes cumulative VaR274, which represents the cumulative remaining VaR. Thus, performing the USD-HKD hedge would reduce remaining VaR from the starting 8,625,302 value to 8,625,302 (i.e., subtracting the value of VaR256for the associated currency exposure). VaR274continues to reduce until it reaches zero for the last exposure reduction action.

FIG. 3Ais an embodiment of an example of foreign currency exposure and hypothetical exposure reduction action data, including analytics data, where the data is unordered and all hypothetical exposure reduction actions have an associated net negative cost. Currency pair310identifies the various currency exposures in the received currency exposure data. In the example, there are eleven (11) currency exposures. In the case ofFIG. 3A, there are only net negative costs. Thus, all currency exposures are negative-cost exposures, which corresponds to N=11 for purposes of calculations described herein.

Exposure data320includes first322and second324currencies, and gross VaR326, similar to what is described above with respect toFIG. 2A. Similarly, hedge330includes first332and second334currencies and an associated exposure reducing action cost336.

Traditional sorting techniques, if any were used, would recommend either performing the hedge associated with the largest VaR first, and down to the smallest until a tolerated risk is reached or a total cost is reached. Thus, a traditional VaR approach would suggest performing a hedge associated with the USD-THB currency exposure, followed by the EUR-USD currency exposure, the GBP-USD currency exposure, and so forth, A traditional cost approach would suggest performing a hedge associated first with the USD-IDR currency exposure, next the USD-DKK currency exposure, followed by the GBP-USD currency exposure, and so forth on to the highest cost hedge the company is willing to pay for (i.e., either to achieve a threshold VaR reduction, or to achieve a threshold total cost).

VaR to C340illustrates a VaR to cost ratio, which indicates VaR reduction efficiency. Thus, larger negative numbers in VaR to C340indicate more VaR reduction per unit cost. Ordering based on VaR to C340provides an ordering based on efficiency (or a “most bang for the buck”) approach. Such an approach is illustrated inFIG. 3B.

FIG. 3Bis an embodiment of an example of foreign currency exposure and hypothetical exposure reduction action data, including analytics data, where the data is ordered by a ratio of VaR to C and all hypothetical exposure reduction actions have an associated net negative cost. The output representation ofFIG. 3Bdemonstrates sorted currency exposures. Ordered currency pair column358shows the same currency pairs of column310inFIG. 3A, but ordered based on Var to C370. All information in exposure data350and its associated columns352,354, and356, and in hedge data360and its associated columns362,364, and366are ordered in accordance with the associated currency exposure identifier shown in currency pair column358.

Observe that sorting in one column naturally changes the ordering of associated columns. The rows of data are grouped. Cumulative data380can be appended or otherwise added to the rows of data. Cumulative data380includes accumulated cost382and cumulative remaining VaR384. It will be observed that the first ordered currency is USD-DKK, which is not one of the first currencies suggest in either a cost-only or a VaR-only approach. However, VaR to C370of the USD-DKK currency exposure of 931.20, which is much higher than another other ratio in column370.

Observe that performing the first four exposure reduction actions as ordered by VaR to C results in a cumulative cost of $11,951 (or 15.55% of the total cost to perform all exposure reduction actions) while reducing the total VaR by $5,104,603 (or 66.70% of the total VaR). Ordering the currency exposures by efficiency of VaR reduction can thus allow a company to make a more informed decision as to which actions would best help it meet it risk tolerances.

FIG. 3Cis an embodiment of an example graphical representation of cumulative cost versus remaining risk for hypothetical exposure reduction actions having an associated net negative cost. The output representation ofFIG. 3Cis another form of output from what is already shown inFIG. 3B. In fact, curve390is an interpolated curve generated from plotting ordered pairs of total accumulated cost on the x-axis against total remaining VaR on the y-axis. In terms of the data representation ofFIG. 3B, graph390is generated from an ordered pair of (column382, column384) for each of the ordered currency exposures358. Point392is the starting point (net zero cost, total remaining VaR). Point394is the final point, which will always result in zero total remaining VaR when the hedges eliminate their associated currency exposure (i.e., reduce it to zero).

FIG. 4Ais an embodiment of an example of foreign currency exposure and hypothetical exposure reduction action data, including analytics data, where the data is unordered and hypothetical exposure reduction actions have associated net negative or net positive costs. Exposure data420includes first422and second424currencies, and gross VaR426, similar to what is described above with respect toFIG. 2A. Similarly, hedge430includes first432and second434currencies and an associated exposure reducing action cost436.

VaR to C440illustrates a VaR to cost ratio computed for each negative-cost currency exposure410. In one embodiment, ratio440is not computed for positive-cost currency exposures. It will be understood that if ratio440represents an efficiency of most VaR reduction per unit cost, the ratio has little to no practical meaning for net positive costs (at most the ratio could be used to show VaR reduction per unit income). For positive-cost currency exposures, it has been determined to make more sense to order the currency exposures by either cost or VaR.

FIG. 4Bis an embodiment of an example of foreign currency exposure and hypothetical exposure reduction action data, including analytics data, where the data is ordered and hypothetical exposure reduction actions have associated net negative or net positive costs. In the output representation ofFIG. 4B, negative-cost currency exposures are ordered by efficiency, by highest to lowest VaR to C ratio470. Positive-cost currency exposures are ordered by cost466, from highest income to lowest income.

Again, currency pair458illustrates a list of ordered currency exposures. Exposure data450includes first452and second454currencies related by an exchange rate, the exposure data having a VaR456associated with each currency exposure. Hedge data460represents an exposure elimination action, denominated with first462and second464currencies and an associated cost466. Observe that darkened line marking the inflection point from positive-cost exposures to negative-cost exposures. Above the line cost466is the ordering parameter, while below the line ratio470is the ordering parameter.

FIG. 4Cis an embodiment of an example graphical representation of cumulative cost versus remaining risk for hypothetical exposure reduction actions with positive cost actions ordered by cost. The output representation ofFIG. 4Cis another form of output from what is already shown inFIG. 4B. Curve490is an interpolated curve generated from plotting ordered pairs derived from cumulative data points480(i.e., generating plot points (column482, column484)) for each of the ordered currency exposures458. Point492is the starting point (net zero cost, total remaining VaR). Point494is the final point, where all VaR has been eliminated.

In one embodiment, additional information not seen on a curve of only negative-cost exposure reduction actions (such as illustrated inFIG. 3C) can be shown. For example, inflection point496demonstrates where on curve490the change occurs from plotting positive-cost currency exposure actions to plotting negative-cost currency exposure actions. In one embodiment, zero-cross point498is identified. It will be understood that an inflection point, zero-cross point, or any other specific point on the graph can be illustrated either by a point of different size and/or color, by an arrow or line, a box around the area, a shape, or other designator.

A zero-cross point indicates where in the sequence of exposure reduction actions the resulting actions would cross from a net accumulated positive cost to a net accumulated negative cost while reducing the value-at-risk. If a company took no action at all, its associated exposure reduction cost would be zero. If any exposure reduction actions are positive-cost, then at some action in the sequence of actions, the cost may cross back over the starting zero mark. Thus, a company could perform only positive-cost actions and make income while reducing exposure, or perform exposure reduction actions up to an action that is closest the zero-cross while having reduced exposure. It will be understood that the specific zero-cross point may be an interpolated point. To achieve the actual zero-cross point in reality, a company may have to hedge against some of an exposure. For example, fromFIG. 4B, the company could perform all actions through hedging against all exposure through the USD-MXN exposure. If the company would like to achieve a net-zero cost reduction, it could then hedge against part of its AUD-USD exposure up to the point of $14,680 in cost (rather than hedging against the entire risk at a cost of $27,412).

In one embodiment, all positive-cost reduction actions can be identified, as illustrated by499. The actions could be discretely identified by their discrete plot points, or the entire “positive-building” portion of curve490could be highlighted, colored, boxed, or otherwise identified.

FIG. 5Ais an embodiment of an example of foreign currency exposure and hypothetical exposure reduction action data, including analytics data, where the data is ordered and hypothetical exposure reduction actions have associated net negative or net positive costs. In the output representation ofFIG. 5A, negative-cost currency exposures are ordered by efficiency, by highest to lowest VaR to C ratio570. Positive-cost currency exposures are ordered by VaR556, from highest VaR reduction (USD-BRL at $1,219,870) to lowest VaR reduction (USD-HKD at $2,707, recalling that reference is made here only to positive-cost VaR reduction). It will be understood thatFIG. 5Ashows an ordering of the same data ofFIG. 4Aas shown ordered inFIG. 4B. However, the output representation illustrated inFIG. 4Bdemonstrates a cost-based positive-cost ordering, while the output representation illustrated inFIG. 5Ademonstrates a VaR-reduction-based positive-cost ordering.

Again, currency pair558illustrates a list of ordered currency exposures. Exposure data550includes first552and second554currencies related by an exchange rate, the exposure data having a VaR556associated with each currency exposure. Fledge data560represents an exposure elimination action, denominated with first562and second564currencies and an associated cost566. Again the darkened line marks the inflection point from positive-cost exposures to negative-cost exposures. Above the line VaR556is the ordering parameter, while below the line ratio570is the ordering parameter. Thus, below the darkened line, the output representation ofFIG. 5Ais identical to that ofFIG. 4Bbelow the line. Observe that the values for accumulated cost582and accumulated remaining VaR584of cumulative data580is the same for USD-DKK on bothFIG. 5AandFIG. 4B, even though the currency exposures above it are ordered in different ways. The cumulative values will be the same for the same set of currency exposures.

FIG. 5Bis an embodiment of an example graphical representation of cumulative cost versus remaining risk for hypothetical exposure reduction actions with positive cost actions ordered by VaR. The output representation ofFIG. 5Bis a graphical output representation based on the same data in the output representation ofFIG. 5A. Curve590is an interpolated curve generated from plotting ordered pairs derived from cumulative data points580(i.e., generating plot points (column582, column584)) for each of the ordered currency exposures558. Point592is the starting point (net zero cost, total remaining VaR). Point594is the final point, where all VaR has been eliminated. Point596illustrates the inflection point.

It will be observed that just as the data below the inflection point inFIGS. 4B and 5Ais the same, a graphical representation of the data as shown inFIGS. 4C and 5Bare likewise identical. Curve590from point592to point596is different from curve490from point492to point496, in accordance with the different ordering.

FIGS. 6A and 6Brepresent a flow diagram of an embodiment of a process for analyzing potential exposure reduction actions including generating a graphical representation of results of exposure reduction actions. Flow diagrams as illustrated herein provide examples of sequences of various process actions. Although shown in a particular sequence or order, unless otherwise specified, the order of the actions can be modified. Thus, the illustrated implementations should be understood only as an example, and the process for establishing the secure channel can be performed in a different order, and some actions may be performed in parallel. Additionally, one or more actions can be omitted in various embodiments of the invention; thus, not all actions are required in every implementation. Other process flows are possible.

All operations, unless otherwise indicated, are performed by an exposure analysis engine or analyzer for brevity. The analyzer obtains currency exposure data,602, by accessing a backend system or by having data uploaded to it. The analyzer identifies all currency exposures in the exposure data and generates hypothetical exposure reduction actions to eliminate each identified currency exposure,604.

The analyzer obtains VaR for each exposure,606, for example, by either obtaining a value and/or computing a value. Obtaining VaR may include obtaining a computed value of gross VaR, or may include obtaining a volatility factor that can be used to compute the VaR. It will be understood that VaR could be computed for some currency exposures and accessed from storage for other currency exposures of the same currency exposure data. Similar to the VaR, the analyzer obtains a cost for each hypothetical exposure reduction action,608, which may include accessing stored costs, receiving quotes, computing a cost, or some combination.

The analyzer orders the currency exposures,610, in accordance with cost and VaR. In one embodiment, obtaining the VaR and the cost can be considered operations that are part of ordering the currency exposures. The analyzer determines whether the currency exposure data includes both positive-cost and negative-cost exposures,612. If the currency exposure data only includes negative-cost exposures, the process follows the “No” branch toFIG. 6B.

If the currency exposure data include both positive-cost and negative-cost exposures, the analyzer identifies what ordering to use of positive-cost exposures,614. It will be understood that the “Y es” branch from 612 would also be followed if there were only positive-cost exposures. However, such a case is explicitly described herein. If the positive-cost exposures are to be ordered by a cost-based parameter, the analyzer orders positive-cost exposures from 1-M from highest to lowest income,616. If the positive-cost exposures are to be ordered by a VaR-based parameter, the analyzer orders the positive-cost exposures from 1-M from highest to lowest VaR reduction per exposure reduction action,618.

Continuing toFIG. 6B, after ordering the positive-cost currency exposures, whether by cost or by VaR, the analyzer computes positive-cost cumulative values for the ordered exposures 1-M,620. The cumulative values include a cumulative cost, assuming all preceding exposure reduction actions are performed, and summing the cost of the mth currency exposure reduction action with the cost of all preceding actions. Similarly, a cumulative remaining VaR is calculated by assuming all preceding exposure reduction actions are performed, and summing the VaR reduction of the mth currency exposure reduction action with the remaining VaR (which itself represents a sum of the total VaR minus the sum of all VaR reductions of all preceding currency exposure reduction actions).

Thus, the positive-cost currency exposures are ordered, and cumulative values generated for them. After ordering the positive-cost currency exposures, or after determining that no positive-cost currency exposure is included in the currency exposure data, the analyzer computes a VaR to C ratio for the negative-cost exposures,622. The negative-cost exposures are ordered 1-N based on the computed ratio,624.

The analyzer computes the negative-cost cumulative values for ordered exposures 1-N,626. The cumulative values for the negative-cost exposures are computed in the same way as described above for the positive-cost exposures. It will be understood that all ordering can take place before any cumulative values are computed, or the cumulative values can be generated in combination with ordering. Thus, the analyzer could order all M+N currency exposures, and then generate the cumulative values. Alternatively, positive-cost currency exposures 1-M could be ordered and cumulative values generated for them prior to ordering the negative-cost exposures. Alternatively, each cumulative value could be computed in conjunction with each ordering determination.

The analyzer generates an output representation of the data,628. The output representation can be generated as a list, a table, or a graph, or some combination. In one embodiment, the analyzer generates indicators to identify information of interest (e.g., zero-cross, inflection point, positive-cost actions) on the output representation,630.