A high-tech company wants to hedge its profit & loss foreign exchange risks, resulting from transactions in six foreign currencies.

Previously, a cash flow hedge was made and executed based on the quarterly, manual inputs by the local business units.

This hedge plan was unreliable and did not include the internal rolling financial forecasts. This resulted in an inefficient hedging strategy and an increased risk of currency volatility, potentially leading to very high costs

• First, a clear definition and standardization of actual reporting was created to obtain insights into the exposure per currency.
• Next, statistical models were built to forecast the exposure per currency using the historical correlation(s) between the rolling financial forecasts and the actuals.
• This led to a reduced error of > 5.5% compared to the existing, manual forecasts.
• Given the large, monthly cash flow of the company, this significantly decreased the financial risks by an order of magnitude in millions USD.