FX Derivatives Valuation Reports - A headache or an opportunity?

How to  generate historical FX derivatives valuation report

Every CFO knows that at least once a year, he needs to value the FX derivatives held by the company. In most cases, a similar valuation report is required at the end of each quarter, and sometimes companies need such a report at the end of each month.

Who provides the valuation results?

From my experience, there is a big difference between theory and reality.

In reality, most companies make use of the value provided to them by the bank in which they execute the transaction. That is, the bank is the counterparty and also the source that provides the values of the derivatives to the company. 

In theory, according to the accounting guidelines - this should not be the case. The bank is a counterparty to the transaction and therefore a company should not use the valuation provided by it. The company can estimate the value itself, but due to the complexity of the calculation and the lack of market data, most companies are unable to calculate it themselves.

Because of the cost involved in purchasing derivative pricing systems, I have seen more than once that the company's accountants are forced to agree that the company will use the value provided by the bank on the grounds that the results are immaterial and the costs involved in calculating the value are disproportionate. But there are accountants who do not agree to this, and the company is forced to hire a risk management consultant whose part of its services is to provide such valuations. More than once companies hire a consultant firm just for valuations purposes without them wanting to use its consulting services.

A problem or symptom for another problem?

The CFO needs to receive currency derivative valuation reports from other parties is actually a symptom of problems and not the problem itself.

What are the real problems?

• The risk management systems cost.

• The market data cost - can easily be more expensive than the system itself.

• Complex to use.

• Lack of sufficient knowledge regarding FX derivatives.

• Therefore, it is no wonder that an industry of currency risk management consultants has evolved around the need to bridge these gaps.

And maybe this is an opportunity?

It is in the company's best interest to know the fair market value of the currency derivatives its holds. It’s true for historical valuation purposes and, more important, for real-time hedging decision-making!  This could be your chance to take risk management into your own hands. After all, no one knows the financial aspect of the business better than you.

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