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If we establish a Euro / GBP cash flow hedge along with a net investment hedge GBP to USD can we prepare an effective program? (Webinar Attendee Question)

We are a US company that has a GBP functional sub with Euro revenue exposure.  We are  trying to establish a hedge for the Euro to USD.  If we establish a Euro / GBP cash flow hedge along with a net investment hedge GBP to USD can we prepare an effective program?

This question was asked during the Proformative webinar "Key Elements of a Successful Hedge Program."  A video of the webinar can be viewed here: https://www.proformative.com/resources/webinar-video-key-elements-successful-hedge-program

Answers

Topic Expert
Philippe Gelis
Title: CEO
Company: Kantox
LinkedIn Profile
(CEO, Kantox) |

Hi Kurt

I am not sure of understand well your question: "net investment hedge GBP to USD", do you mean that the US company invest in GBP and thus can use the EUR / GBP cash-flow to invest in GBP?

Regards

Topic Expert
Helen Kane
Title: President
Company: Hedge Trackers, LLC
(President, Hedge Trackers, LLC) |

You can get an effective “economic” hedge from EUR to USD with the strategy you proposed above, however it won’t protect your P&L. If you are looking for P&L protection you will need to find a proxy hedge of a GBP long/USD short position. This could be GBP denominated sales from parent to GBP sub, or USD denominated sales from parent to GBP sub, or USD denominated costs of GBP sub from 3rd parties. For alignment in earnings under ASC 830 you will want the timing of the EUR/GBP and GBP/USD trigger (stop collection of OCI) and release (release amounts in OCI to P&L) events to be coordinated. You may want to evaluate the functional currency of the GBP entity.

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