Page 230 - Accounting Best Practices

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11–18 Centralize Foreign Exchange Management
also take a share of the investment profit. This option is cost-effective for those
companies paying at least half a million dollars in insurance expenses per year.
One should also pay for up-front legal advice on both the applicability of this
approach and the tax deductibility of contributions made into a rent-a-captive.
Cost: Installation time:

11–17 USE INTERNET-BASED RISK MEASUREMENT SERVICES
Anyone who invests in various types of equity on behalf of a company may, from
time to time, have a queasy feeling that there is some degree of risk associated with
those investments, but has no way of quantifying it without paying for the services
of a finance expert. Also, it may be useful to report to senior management on the
measured risk of the current basket of investments, if only to provide a defense in
case there is a drop in their value at some point in the future. This valuable risk
analysis tool is now available through the Internet at www.riskgrades.com.
This on-line service grades the risk of any equity that the user enters into the
system, reviewing its equity, interest rate, currency, and commodity risk. This
results in a “RiskGrade” that is an indicator of risk based on the volatility of
returns. RiskGrades are determined by comparing the current estimated return
volatility of an asset to the market-cap weighted average return volatility of a set
of equity markets during normal market conditions. A RiskGrade of zero indicates
price volatility of zero (as would be the case for pure cash holdings), with higher
RiskGrade ratings indicating a higher degree of volatility. These RiskGrade
scores can then be used to compare the risks of various assets or entire portfolios.

Cost: Installation time:

11–18 CENTRALIZE FOREIGN EXCHANGE MANAGEMENT

A company that has multiple divisions conducting business with other countries
may be spending too much money hedging its foreign exchange risk. Each divi-
sion will hedge its exposure without regard to the exchange positions of the other
divisions, which may result in excess hedging costs. The reason for the excess
costs is that one division may have a large account receivable that is payable in
(for example) British pounds, while another division may have a payable in
British pounds. Each one may pay to hedge the risk on pounds, when in reality,
from the perspective of the entire company, the receivable and payable positions
of the two divisions offset each other. Only the difference between the two posi-
tions needs to be hedged, which is less expensive.