An Eurozone fashion company operates with an 8-quarter (24-months) rolling budget plan.
Fashion production is to a large extent outsourced to Asian factories and starts 24 months before the styles are being sold in retail stores. Asian production costs are being paid in USD and average at c. 270m USD annually, equaling c. 25 to 28% of the company's annual revenue.
For new fashion lines, the company's demand model estimates future revenues with accuracy of +/- 20%. 8 months after the collection has been announced and presented to wholesalers, demand estimates are being updated using actual data from wholesale orders. After 12 months, the fashion line is fully sold to wholesalers, and the expected revenue as well as expected production costs are known with accuracy.
With a two-year supply period for fashion, Asiapac production imposes quite a risk to EU retailers.An appropriate hedging strategy must be able to cope with the uncertainty of EURUSD exchange rates, future interest rate differentials and the inaccuracy of the company's own volume estimates.
User stories about the problem
In my duty to provide appropriate financing and liquidity, our financial department aims to gradually reduce the variance of our EBIT. Thus, we have implemented a hedging policy. We maintain a minimum hedge ratio of 25% during 8 months after start of the planning period, which increases to 50% after 12 month elapse. To limit surprises during the last phase, where production resources have to be committed, our hedge policy demands an increase to 75% for the the last 6 months of the planning cycle to keep volatility within a controlled corridor.
Making a decision whether or not to hedge and how much of our total exposure to hedge is a tricky thing. One year in the past and back then, our treasury department hedged 100% of our currency exposure. In those days, the Euro moved in our advantage, but we did not benefit. When the US-Dollar invoices were due, we had to buy US-Dollar for a higher price than the market price.
With this experience in mind, the then following year our management decided to not hedge at all - and let our exposure run.
'We do not have a currency exposure,' our management stated. 'We translate Euro into US-Dollar when we need them.' That again was not a wise decision. You cannot eliminate risk just by ignoring it.
Solution: Hedging with Big Data and AI.
Big Data technologies and Artificial Intelligence enable optimal hedging for the first time.
Supercomputers, mass data, a HEDGE21 smart digital assistant and a company’s personalized revenue and cost model finally allow for optimal sizing and timing of a hedge.
For an optimal hedging strategy, the fashion company introduces an algorithmic hedging software, which relies on Big Data and Artificial Intelligence to provide mathematically optimal results. HEDGE21 digital assistant integrates with busy, specialized software agents to obtain daily real-time data from both worlds – from inside the company and the world outside the corporation alike.
HEDGE21 software agents capture company-internal daily exposure data or integrate supply and procurement models. Their up-to-date data are being broadcasted via the HEDGE21 communication infrastructure to be fetched by the HEDGE21 digital assistant.
A HEDGE21 component which takes care of external, i.e. market, events and moves, the Recognized Market Picture®, provides situational awareness of the market on different granularities. The Recognized Market Picture® is market awareness of the day(s) ahead – comparable to a daily weather forecast with the weather ahead to the next weekend.
This information is being used by the HEDGE21 digital assistent for optimal decision-making. But it also can support the treasurer who observes the markets closely.
The Recognized Market Picture® integrates with a HEDGE21 digital assistant, the smart machine that can make sense of the overall situation.
A HEDGE21 digital assistant is an optimizer which makes optimal decisions under uncertainty. A smart digital HEDGE21 assistant:
and informs the treasurer about its findings through a daily feed.
Profit margins are being preserved while currency volatility is smoothed out.
hedge21 benefits for treasurers
Your current hedge process remains intact.
No need to change your TMS, ERP or trading venue. A HEDGE21 digital assisitant rather behaves like a person which needs to be compliant with your company-internal directives.
We can prove it - given the data it processes, a HEDGE21 systematic decision always computes the optimal hedging decision. In this respect, it has super-human capabilities.
A HEDGE21 digital assistant can be your "designer baby". You tell us what your hedge process is and how much risk-averse you are - and we will train a HEDGE21 digital assistant exactly to your needs. If you consider to evaluate a different hedge process, test it out first by using designed-to-order HEDGE21 digital assistants.
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