Daily FX Performance Reporting in a Corporate Environment

A dealing room in a bank is supported by an analytical department that looks into the results generated from foreign exchange (FX)-related trades on a daily basis. Many corporates exposed to substantial FX risks lack the tools and the human resources to perform a similar analysis. Often FX results are only known after the monthly accounting procedures have been executed. Even when unexpected, these results are accepted and reported accordingly.

This article focuses on the ‘why’ a daily FX result analysis is required, as opposed to the ‘how to’. The following arguments justify the need of a daily FX performance analysis and reporting; these can be human-, system- or market-related.

Reporting Challenges

The FX result booked can be reported at the wrong level of the income statement. FX results are driven by exposures on the one hand and by market fluctuations on the other. When a result on a particular position is calculated, an accounting document is created posting a movement on a balance sheet account versus a movement on a profit and loss (P&L) account. After posting all results to the applicable accounts, companies publish their financial statements.

The FX performance is reported in the income statement. Depending on the characteristics of a particular account, the results can be reflected either at the level of operating income or net income. When the results are reported at different levels of the income statement, the information can mislead shareholders and analysts.

Exposures that are not identified in time, or never identified, result in unexplained P&L movements. Multinationals employ many people with different backgrounds and not all of them have experience in treasury and/or risk management. It is up to the treasury department to create awareness around the underlying risks of particular processes within the group. A daily FX P&L analysis will much earlier indirectly identify exposures that were missed out and therefore appropriate action can be taken sooner.

For example, if an accountant posts a specific balance sheet item in a foreign currency (that is not covered by the daily hedging procedures) without notifying the treasury department, this position remains unhedged. At the end of the month, when this item is revaluated, an unexpected FX result pops up.

Procedural changes may call for a new balance sheet account that allows posting in foreign currencies. A lack of communication concerning this new account or the wrong setup thereof can cause problems, such as the account not being selected in the valuation runs on the balance sheet items and FX results not correctly accounted for.

Human Error

Mistakes can be made by treasury dealers because of the pressure they are under. A long position can accidently be hedged with another long position, or a short position with another short position. If the dealer runs a full exposure report a few times a day, they will probably detect the error and correct accordingly, i.e. lock in a gain or loss. It is their choice to report this error; however, these situations can be avoided.

Besides the treasury dealer, the back officer can also be responsible for errors. A deal that was wrongfully changed can generate unexpected results for quite some time and even lock in these results. Erroneous rates in internal deals can shift FX gains or losses between two companies of the same group. If the incorrect deal was concluded with an external counterparty, the result will be rectified when the deal is settled and the final cash flows occur on the bank accounts.

Even when FX dealing is automated via on line trading platforms, errors and even complete off-market exchange rates still occur. FX contracts which less frequently exchange-traded currency pairs can be completely wrong and may even slip through automatic reconciliation systems of banks. If it is an uncommon quote, the dealer will select the best offer displayed by the trading system. As the process is fully automated, they might assume the system is always correct. For particular crosses, however, it is quite possible that the trader at the side of the bank is manually typing in a quote, raising the risk of mispricing.


In many treasuries, the focus is more on covering an exposure than on timely hedging and matching the hedge to the maturity date of the exposure. Not hedging in a timely manner stretches the period the exposure is open and therefore the risk of the spot rates and swap points moving unfavourably. A position should be hedged as soon as possible, and this can be facilitated by having an online or nearly real-time exposure report available.

Besides timely hedging, it is also advisable to hedge via a contract that matures on the same date as the exposure matures. An FX portfolio and the underlying exposures will typically be mismatched in time, as it is often impossible to have a one-on-one match between all exposures and the related hedges. When an FX contract matures earlier than its underlying exposure, the FX deal will be swapped to another month, keeping the FX exposure covered but creating an interest impact. An FX portfolio that is completely mismatched in time generates daily interest results of which companies are not always aware. Depending on how much the yield curves of the different currencies in the portfolio diverge, the FX result will be subject to higher or lower interest related changes. Today, interest rates are very low (close to zero levels), which minimises the effect of interest fluctuations on the overall FX result. However, when interests start to rise, the importance of guarding the mismatching in a portfolio, as well as the follow up on its result, will increase.

System- and Market-related Issues

Besides human errors, there can also be system setup issues and even market mistakes. Companies have different options when it comes to managing FX-related processes from a system viewpoint. These can vary from running all FX-related hedging and accounting manually to housing everything in a fully automated treasury management system that is integrated with the enterprise resource planning (ERP) system. When FX accounting is a manual process, valuations can be calculated via a spreadsheet, or companies can request the valuations with their banks and post these figures in the accounting software or ERP systems. As in most situations, manual work increases the risk of errors.

Before the processes have been fully automated, a system implementation, involving substantial testing, needs to be done to make sure the setup is done properly. The people involved in these implementations need to be well experienced in treasury matters and have the capacity to translate the requirements of the companies into a correct system setup. Detailed testing of all possible scenarios is necessary and one should remember that, even when the initial system implementation was flawless, system errors can still occur in the future. Revaluating FX deals calls for correct spot rates, yield curves and calculations. The system could pick up the wrong spot or interest rates, miscalculate discount factors, post valuations to the wrong accounts or even skip the valuations on particular, less obvious items. Here is an example that will explain the latter.

FX exposures stemming from future interests received on a long term deposit with fixed interest rates are included in the exposure report and are hedged accordingly. However, if setting up the valuation of future fixed interests paid or received on long term loans was forgotten, then only the nominal amounts are revaluated. When these interests are hedged via separate FX deals, the valuation there on is automatically booked. This will result in a wrong picture on the income statement that will be corrected each time an interest settlement takes place and a realised result is posted. A system shortcoming such as this will create an unexplained result in the daily P&L analysis, and further investigation will result in correcting the setup.

Market disruptions are another contributor to unexplained results. The interest parity theory suggests that swap points calculated from interest rates are in line with the swap points made available by market data providers such as Reuters and Bloomberg. However, during the financial crisis the market equilibrium got distorted several times. When this happened, an FX deal that was agreed upon only a few minutes earlier would already show an interest result – as the yield curves used for discounting the flows did not reflect the same interest differentials as were calculated in the swap points. In stable market circumstances a newly dealt FX contract would only show a negligible interest result.


Most arguments for a daily FX result follow up are referring to particular mistakes that can occur while executing FX risk management activities. People are crucial to the efficiency of these processes and are often the cause of unexplained FX results. Most common errors are caused by traders, front or back officers, local accountants or people responsible for system configuration. Having a strong treasury or risk management system in place is of the utmost importance for a corporate and can automate many processes, lowering the risk of human errors. However, when markets are disrupted, even a streamlined FX risk management can still not be sufficient for a completely controlled FX result.

Companies exposed to considerable FX risks should implement a daily P&L reporting by making use of their treasury management system. Installing such an analysis will improve the risk management performance and by identifying issues much earlier, it will avoid future unexpected losses. A thorough understanding of FX results has gained in importance as the financial crisis brought market volatility and disruption. By understanding the importance of FX risk management and improving relevant processes, the company, and therefore the shareholder, will eventually gain from any investment in this area.


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