Treasury teams, in recent years, have experienced a two-fold operational creep within their day-to-day tasks. As organizations look for efficiency among financial operations, teams have fallen in size. At the same time, hedging programs remain as complex – if not more so – than ever.
This has forced Treasury teams to develop strategies and systems to not only effectively manage complexity within the hedging program, but to do so in a way that optimizes the efficiency and the value of the team members.
That’s not meant to diminish the importance of hedging programs. When dealing with organizations that have operations across the globe or span various asset classes with shifting costs and values, hedging programs have become vital to ensure returns remain within acceptable ranges of outcomes.
This is where developing processes and systems, and leaning on automated features within your hedging program, will improve results and showcase value at the Treasury level. To pull this off, it takes the right plan, along with the right technology.
This article features a Q&A between Alison Fletcher, Treasury Market Specialist at Bloomberg, L.P., and Daniel Swatridge, Assistant Treasurer at Centerra Gold Inc., about the 5 reasons automation empowers your hedging program. (Edited for flow.). Centerra Gold Inc. is a Canadian-based gold mining company focused on operating, developing, exploring and acquiring gold and copper properties in North America, Türkiye, and other markets worldwide.
AF: What do you hedge at Centerra Gold and why?
DS: Those existing hedging programs would be our diesel hedging program where we’re hedging the input costs of fuel at our Mount Mulligan Mine. We also have a Canadian dollar (CAD) hedging program, which is our biggest hedging program. We get the revenue in US dollars and all our expenses are in CAD; we’re basically hedging that mismatch.
We also have a copper hedging program where we have a price floor that we have put in place to protect the price that we realize on our copper sales. And, lastly, we have a royalty streaming hedging program where we’re basically matching up a timing mismatch.
We don’t hedge everything. For instance, gold investors want exposure to that asset class. That’s why they invest in gold mining companies. We leave that price exposure in place.
AF: How do you decide what to hedge and what not to?
DS: Our decision process flows through our quarterly management committee. This committee consists of the senior management, CEO, CFO, VP of Finance and the VP of Business Development. Basically, every quarter we come to them to report on our existing hedging programs.
We want management to know we’re looking at all these risk exposures. Then there’s a decision being made whether or not we think that we should hedge or not.
We integrated Bloomberg MARS, which was kind of a no-brainer for us. That process really helps us to quickly analyze bank processes on differing fixing rates. As a treasury team, before we were just being data aggregators. By using this tool, we’re able to do that second-level analysis.
MARS’ scenario analysis is really useful in this because you can do things like step up rates. If you’re looking at USD to CAD for example, you could do kind of even rates like 1.3000, 1.3500, or 1.4000, and see what your portfolio looks like then. Or you could also do what we do, which is a relative percentage shock. If the rate changes, then this is going to change by this magnitude and that’s something that we deliver in a monthly report.
Management is aware that this rate has changed a lot. It’s really showcasing the value that you’re adding by practicing good risk management.
AF: What other ways do you test and measure different hedging prices and options within your program?
DS: We also like to use option valuation tools. If it’s an option grant in terms of the shares, we will test those to make sure that the pricing is coming in where we’d expect it. It’s valuable and helps feed our decision in terms of what instruments we use, which is ultimately bound by our policies.
Our policies allow for swaps and then the use of options, whether it’s a put or call and others. When evaluating the decisions, we’re always looking at the primary focus, which is protecting our budgets and, necessarily, our cash flow. That’s our main focus, but we’re also taking a look at, ‘are we able to protect the cash flows using the forward?’ If not, we might use a collar there, as an example.
AF: How much leeway do you give your program when evaluating different prices or solutions?
DS: We want to make sure that we have adequate participation, as well as we’re looking at the symmetry on puts versus calls. To use the call, you want to make sure that you’re getting something. If you’re giving up that initial point where you have surety over it. That’s mainly what we’re looking at and balancing the fact that we have minimum and maximum hedging coverage ratios for each one of those years.
We’re trying not to get too far behind the eight ball where we’re necessarily having to go into the market and catch up to get to the minimum hedge coverage ratios we seek. And we also still want to keep some dry powder on the table by taking advantage of market moves.
AF: Where do you find the advantages of managing this process electronically, especially with your foreign exchange hedges?
DS: We generally use FXGO (Bloomberg’s FX electronic trading platform) for a lot of short-term cash needs. It provides rapid execution as well as it’s super-efficient on the back end. The thing that we like about it is when you go into the Bloomberg Terminal, FXGO is seamlessly integrated, and you can choose which banks you’re getting quotes from.
You’re basically lining up the best price execution available. And then, when you are hitting that, it’s basically taking a log of how you did in terms of the price execution that you executed against and what the competition was. This is something that you can use as a valuable tool to track over time. You can show how this tool has benefited the treasury program.