Why you might not want to use Excel for FX hedging in 2020
Updated: Oct 29, 2020
The Swiss Army knife for Analysts – Excel is the universal tool to solve many challenges. As it is flexible and easy to use, it often ends up being the backbone of many critical processes essentially due to the philosophy of “if it ain't broke, don’t fix it”. Studies have found that managements' gut-feeling of the number of shadow IT processes that are run must be multiplied by 15.
Some still remember the London Whale - when JPMorgan Chase lost more than $6 billion in its “London Whale” incident, in part due to Excel spreadsheet errors, including alleged copying and pasting of incorrect information from multiple spreadsheets. In 2012, it became clear to the market that one trader at JPM was counterpart on almost all the CDSs in London. JPM’s risk management failed to notice this due to risk processes run in Excel, and copy-paste errors made the Excel sheet miscalculate the risk. To unwind the huge CDS positions, JPM had to endure a considerable loss.
This is of course, an example of when it goes terribly wrong – unfortunately, it is not a single “whale” – with 150 million users, Excel is widely used as a fast track to getting stuff done inexpensively, resulting in huge errors in the overall calculations and losses for their companies. This is also the road to Shadow IT, with the downside of undocumented processes; unscalable, inconsistent business logic and lack of security amongst many other cons.
Human errors are prone to happen, as several studies confirm, and although Excel can be a useful tool in calculations, the possibility of errors ending up in spreadsheets grows as the immense amount of data increases. Today, many companies are still running their FX Hedging programs in Excel. This is because they want to do something, and the analyst can process the numbers needed to excel (no pun intended). The problem, however, starts when one of the following scenarios occurs:
Documentation of the Excel sheet is not up-to-date or completely missing
Not remembering all the logic - e.g. hidden cells, expanded tables, manual tasks, etc.
No-one has ownership of the Excel sheet and data sources
At some point, the analyst has moved on to another position, leaving the next FX trader to figure out the logic used in the trading sheets
Excel is upgraded
Since FX Exposure is often very high and fluctuations have huge P/L impact, the result is a high exposure in FX handled in a risky solution. Even though many have processes that will catch errors, these controls run the day after trading – that means these companies are only one tweak away from disaster. Altogether it is clear: when dealing with a hazard such as the FX risk, it should be hedged with precision. Miscalculations and false estimations can have serious consequences, as highlighted with the London Whale case. While Excel can be useful for certain calculations and served a purpose in the past, there is far too high a risk involved when it comes to FX hedging; new ages require new solutions.
SaepioX is designed for FX hedge professionals – making the hedge processes as smooth as possible, so time is spent on FX Trading, not on data crunching. Stop using tools that are not built to support your business and processes and get into this millennium and demand solutions that do all the tedious work for you.
– contact SaepioX here and we will review your excel sheet to give you a second opinion - for free.