2021 Outlook Series:
Talking Technology While Considering Financial Exposures

INTRO: 

Welcome to the Treasury Update Podcast presented by Strategic Treasurer, your source for interesting treasury news analysis and insights in your car, at the gym or wherever you decide to tune in. On this episode of the podcast, host Craig Jeffery kicks off the 2021 Outlook series featuring interviews with treasury experts about their expectations, projections, and insights for the year ahead. On this first installment, he sits down with Todd Yoder global director of treasury at Fluor Corporation for an in-depth conversation on technology, financial exposures companies are facing today in their impact on treasury groups. Listen in and enjoy the entire series. 

Craig Jeffery: 

Welcome to the Treasury Update Podcast, this is Craig Jeffrey and I’m here with Todd Yoder of Fluor Corporation. He has been a repeat guest on the show and he has also taken part in a recent FinTech hot seat panel discussion on technology. Welcome back to the podcast, Todd. 

Todd Yoder: 

Thank you, Craig. It’s great to be back. Thank you for the invitation. You always have great guests and an awesome content. So happy to participate and be a part of it. 

Craig Jeffery: 

With the title diving into the deep end talking technology while considering financial exposures, it makes sense to do a little bit of a preparation before we get into the questions. Just a couple of themes here, they should be familiar to our listeners. Technology is changing quite rapidly and dramatically. It’s having a significant impact on treasury groups, but this impact is very uneven from group to group, from treasurer to treasurer, from company to company. And I wanted to have a discussion about technology, not just about technology, but in context of a specific challenge that treasury faces. 

Craig Jeffery: 

And there’s lots of challenges that treasury faces. So rather than just having a tech talk, we wanted to have an issues discussion. So the challenge Todd and I wanted to discuss is related to financial exposures. What are the financial exposures a company faces? And maybe to do that, and to look at the role that tech plays into it, maybe we can begin with the issues of exposure. What are some of the issues that you face with regard to financial exposure? 

Todd Yoder: 

Yeah. The biggest issue I think for all treasures is our ability to predict the future. It’s pretty hard to do. But as it really- 

Craig Jeffery: 

Our ability or inability? 

Todd Yoder: 

Yeah. I tell people all the time, right, if I could predict FX rates or I could predict financial markets, I would be on the beach right now and relaxing. You guys could make a lot of money and work for me and I could feed you in the answers. Now I think what I was going to focus on is, in the foreign currency realm, is just cash flow exposure, balance sheet exposure and then the FX volatilities. And part of it I have noticed even as some recent conversations with some of my colleagues and other treasurers and other corporations is, identifying what I call the silent killer in the cashflow FX exposure. 

Todd Yoder: 

As compared to balance sheet exposure where it gets a lot of airtime, a lot of coverage because that remeasured impact shows up in … A lot of times in the other income and expense line. So if you’re a CFO and you’re talking about FX impacts, a lot of times you’re talking about that balance sheet re-measurement. Those sometimes realized unrealized impacts that go through other income and expense. And I hate to say, ignorance is bliss. The old cliché, ignorance is bliss, because these are some of the smartest people in the world. I mean, a lot of them Fortune 500, there are a lot smarter than I am that’s for sure. 

Todd Yoder: 

So, let’s not call it, ignorance is bliss, let’s just call it a lack of knowledge is paradise. Right? So, think of that fettuccine alfredo, you’re at dinner and they bring you that meal and it looks delicious, it smells delicious. And then they tell you, “Hey Craig, before you eat this, we just wanted you to know it’s 1500 calories and 50 grams of fat.” That might make you think twice. Right? So, the lack of knowledge, the lack of understanding that is paradise. But that’s one of the things with cashflow FX exposure, is companies still a lot of times have exposures they’re dealing in foreign currencies. 

Todd Yoder: 

A lot of them as the world has become more globalized, even just in the last three years, they’re taking on these exposures. And if they don’t see the impacts of that, they see margins ebbing and flowing. And depending on how sticky your prices are, and if you can pass that … Those impacts onto your customers and part of it, it’s not just how sticky your prices are, but what are your competitors doing? And so, I think an easy way to explain it, or at least I’ve found is the airlines, because everyone seems to be able to relate to the airlines and understand the airlines and how they work because a lot of us fly. Right? 

Craig Jeffery: 

We used to. 

Todd Yoder: 

And so flight prices … Yeah, that’s true, very too. Not as much anymore, but prices are not very sticky. Right? Airline prices, flight, they can change pretty rapidly quickly, but other businesses prices are a little stickier and you’re not able to adjust your price necessarily and pass that on to the client. The other thing with airlines that’s good to use is, some airlines hedge fuel exposure and some don’t. And so that adds a whole new paradigm to it. But it’s an easier way to do it. 

Todd Yoder: 

But you still have a lot of companies, a lot of corporations that they’re doing this business and they see the re-measurement and they say we’re going to hedge FX and they’re going to hedge balance sheet re-measurement. And they take out that volatility through earnings, and try to get it as close to absolute zero as possible, no big gains, no big losses. And they say, “Thumbs up, we’re doing great.” But what they’re missing is that exposure within the cashflow portfolio. 

Craig Jeffery: 

Could you unpack that just briefly. When you say they take it out of the balance sheet, but there’s still the cashflow impact. How would you describe that to someone, maybe a new executive officer who isn’t a well versed in financial statements? 

Todd Yoder: 

The way I would explain it is, you have cash inflows and you have cash outflows. Right? You have differences, you have mismatches in not only the timing of those cash inflows, cash outflows, but you have mismatches in volumes as well. 

Craig Jeffery: 

So ticket sales are inflows? Earlier outflows might be fuel that you expend when you actually fly for example? is that your example there? 

Todd Yoder: 

Yeah. For that it might get confusing. If we used a manufacturing environment, so I’ve worked in manufacturing fixed price, and I’ve worked in services and FX at all three different kinds of companies. But if we use manufacturing, let’s say you have a manufacturing hub in Poland. So you have a lot of local costs in Poland, and then India is another popular one or maybe China. And you’re selling into the European market and you’re selling into the US market. So you’re going to costs in those currencies where you’re manufacturing probably heavy costs. 

Todd Yoder: 

And then you’re going to have cash in flow in the markets you’re selling into. So there’s going to be the mismatch to exaggerate the example. Depending on the company, no company is the same. Right? Every company is different, has different dynamics. So those cash inflows, cash outflows are going to be what I call the economic risk. And depending on how you’re measuring those impacts to your cash flows, the FX impacts, are you looking at actuals versus prior year, or are you looking at actuals versus a plan rate, a budget rate that you set out? And then how is that plan rate put together? 

Todd Yoder: 

And then when you’re booking transactions, are you using spot rates to book transactions or are you using average rates? Those are the two most popular. But once you book those transactions then they become … Depending on your functional currencies of your entities, they become the nonfunctional monetary asset and liability positions that lead to the balance sheet re-measurement. But that cashflow exposure, depending on how you’re looking at it … And I think I see more companies looking at translation. So they’re looking at earnings and FX impacts on earnings, but what they’re really talking about is translation and consolidation. So that’s the third leg of it. 

Todd Yoder: 

So if you start with transactions and cash flow risk, and then that moves into balance sheet exposure. And then once you have everything remeasured to the functional currencies of all your entities, then you bring it back to your reporting currency and that’s the translation and consolidation. So, if they’re reporting constant currency in FX impacts, and some companies do and some companies don’t. But as far as economically, it’s defining what your objectives are and then how you’re going to measure. 

Craig Jeffery: 

I’d like to get into some of the issues and what you’re doing to address them in two ways on the tech side and then on the risk management side. But maybe we could start on the tech side. What are some of the systems you’re using, or the tech that you’re employing to do this? Maybe you can talk us through those areas. 

Todd Yoder: 

Craig, every company is different. And so the tech stacks are going to look different. Not only are the treasury department different. Right? But the IT group, the cultures are different, the exposures are different. So you have a lot of different dynamics at play. As we talked about cashflow exposure and how that can be the silent killer, I think, part of it is when you’re putting … When you’re thinking about a tech stack, go back to the 10 steps of understanding what your exposure is and what hoops you need to jump through. So the identification of exposures and then confirming the exposure, validating those exposures. And you want to have a clear objective quantify those exposures. 

Todd Yoder: 

We can get into the math of that and the statistics, and that’s where technology I think is playing a big part. Technology is also playing a big part in the validity … Verifying the validity of the exposures that you’re pulling. But based on that objective, technology and the hedge accounting part of it right, is big. Whether it’s Dodd-Frank EMIR and at Fluor we have a huge global footprint. So it’s gap accounting for other countries, foreign countries that have their own gaps. Hedge effectiveness, testing technology is there. And then when it’s time to trade. Right? So decision time. And then market to market of course, in journal entries for FX hedging. 

Todd Yoder: 

And then data visualization is one of my favorites for technology and the applications there. We talked about a project that I’ve been working on, which is … It has been focused on identifying exposures and using technology to pull those in. And I told you, and I actually wasn’t joking. So when I started working with Fluor 10 years ago, I got an SAP login and I logged in one time. And here we are 10 years later and I’ve never logged in since then. But using technology and creating what we have as a data lake, and we’re feeding exposure data into that, it makes it very easy. So I can hop in, punch in a URL and I can be in my data in my SAP data within seconds. 

Todd Yoder: 

And so that has been one of the huge benefit to that. It’s also given us the flexibility with this structure to add market data. So feeding data directly into my database, and I have a data subscription through Bloomberg which gives me a lot of data. So for now I’m just using FX rates, implied volatilities, and the forward curves and … and correlation. Some of those basics that you need to really quantify and look at optimization of hedging before you make that hedging decision, those are things you want to take into consideration. 

Craig Jeffery: 

Yeah. Todd, can I just jump in with a question there? You mentioned about you had your SAP login 10 years ago and left it dormant. But what I’m hearing you saying is that now you’re accessing a lot of SAP data through your data lake, through easier visualization tools, as opposed to the … Yeah. And you’re probably getting more of it faster. 

Todd Yoder: 

Yeah. More data and much faster. So even when I had reports run for me in SAP by the team and put together, it was taking quite a bit of time. Sometimes it’s, well, we need to let that run overnight. Right? That report SAP report run overnight based on what you’re looking for. So now it’s … Instead of that it’s me, I can easily pull data I want. I’ve got dashboards, I’ve got reports. I can click through data and it’s more of a top-down approach. 

Todd Yoder: 

So it’s completely changing the approach as before. In the past without the technology is it was more of a bottom up approach, consolidating of a lot of different numbers and data points into summary tables. Now I’m starting with the summary table and then I can drill down as I need to or want to. 

Craig Jeffery: 

So you’re taking all of this exposure data and other data, market data, curve data, I think you mentioned. You’re, I don’t want to use the term cramming it, but you’re cramming the … Cramming into this data lake which doesn’t really have a lot of restrictions in terms of how much you can put there. And then you’re able to use these tools and dashboards to see it much more rapidly in a way that’s dramatically different than like you said, the bottom up approach? 

Todd Yoder: 

Absolutely. 

Craig Jeffery: 

I think when we spoke before your … On either the FinTech hotseat I think you mentioned, you have your … An internal data lake that’s run on your own servers, your IT has set that up. What do you use? You mentioned Bloomberg too. What are you using for some of your data analytics and transformation? What are some of the tools you’re using to do this? 

Todd Yoder: 

Yeah. This I think it’s going to be for every company. If you’re in an SAP shop or you have whatever ERP, and a lot of companies have multiple ERPs. So sit down and before you start building just architect it, sketch it out, get the right people in the room. And I say that so you can avoid the data lake becoming the data swamp. Right? Because it doesn’t do anyone any good to have a data swamp. It’s going to slow you down. Even if there are good pieces of data in there, it’s just going to slow down performance and have an impact on that. So yeah, so various technologies to use that. 

Todd Yoder: 

What I enjoy about our specific data stack is, I have worked closely with IT and we’ve built out all the connections to pull and work closely with Bloomberg. All the connections to get the data, expose your data out of our ERP and from Bloomberg and into our treasury data warehouse. And then once that data is in our treasury data warehouse, I have a lot of different power BI dashboards and reporting that I can use. And that gives me the flexibility to do click down, so I’m top down instead of bottoms up. I can start with the summary report. And it’s helpful if you’re looking for trends anomalies in data, and then you can drill down into the details you want. 

Todd Yoder: 

But it also gives us the flexibility to use the open source programming languages, which I think Craig you’re interested in, a lot of people aren’t interested in it. To me it’s the sexy stuff. So, it is the coding, the machine learning. And we’ve talked before about back in the days when we used to be able to travel and I was doing the Copenhagen presentation at Euro finance, and I did the Python examples. So had the audience, did a live demo where we went in and downloaded … Went to Anaconda, downloaded Python and Jupiter notebook environment and got to work and actually did a little bit of coding. I know we talked about this the other day and you had mentioned Python. So Scikit-learn is in Python. 

Todd Yoder: 

So, you’re going to download probably use Anaconda and pick up Python, the latest version of Python. Then to start for sure you would use a Jupiter notebook to … If you wanted to do some coding. And it’s so much easier than what I think people realize now. If you get into the super complex and you’re really trying to be predictive, and you have an extreme amount of data, it’s not something a treasurer honestly, I think is going to be doing on their own. But at least they’re going to know enough to work with the right people, to do … But Scikit-learn just allows you statistical, so you can do the classification, regression, clustering are the ones that … But there’s other things you can do as well with it. 

Craig Jeffery: 

For the audience, would you define Scikit-learn as a machine learning in Python or would you say it’s more of a…? Well, how would you describe it? 

Todd Yoder: 

It is a machine learning package. Scikit-learn is a machine learning package. So it will allow you to do a lot of different things. So if you’re looking at running regressions, you could do that. If you want to do classification, you can do that. On our panel discussion we did Craig earlier this year, one of the guests talked about the support vector machines. You could do that with Scikit-learn, nearest neighbors, random forest. There’s a lot of different algorithms that you can run using Scikit-learn. 

Todd Yoder: 

So I think it’s probably one for treasury groups, straightforward APIs, and just the breadth of algorithms, I think is going to be a good pick for treasures that want to get their teams into machine learning and start to dabble with the possibilities there. If you have the data and you have the … Like in my case, I have built out the data lake with the full intention of being able to access that data, to use open source programming languages to do things, machine learning, back testing, and analyzing, helping quantify FX exposures. 

Craig Jeffery: 

Yeah. Very good. I think I still am going to ask this question. The question I was going to ask was how has all of this tech changed treasury? And I’ll just summarize a few things and see if you have anything else to add that I missed in your discussion. One, there was the amount of data that you have access to is increased, but there’s either a continuing or an additional concern of making sure it’s good quality hence your comment about data lake versus data swamp, making sure that it’s there. 

Craig Jeffery: 

The other one had to do with reporting needs and speed. You talked about, you’d run these reports, they take overnight, now they’re almost run instantly. You can get these insights from this top-down approach, look at the macro, see issues, dive in in a more detailed basis to test drive hypotheses, find out issues and come up. Are those the key areas how it’s changed treasury or is there something else too? 

Todd Yoder: 

Yeah. I think those are some key areas that it’s making treasury better, smarter, faster, more real time. But there’s more to come. Right? With these technologies. And every day we’re thinking about new applications. I mean, when you look back in history right, the wheel was … They say the wheel was invented 3,500 BC or in that area but it wasn’t used for carts or chariots for 300 years after the wheel was invented. It was used for shaping clay. And so a lot of these technologies, they’ve been here a little while, but we’re figuring out how to use them to do things a whole lot smarter. 

Todd Yoder: 

So as we’ve talked about in the past, the cost of compute and processing power is cheaper than storage. But a lot of it is just the development. So the development of these software and the code that is being written, there’s so many libraries with great code and a lot of projects that … And so it’s exponential. That’s what I think a lot of people they have a hard time grasping, exponential. A good example I heard a few weeks ago was, Craig, I have a a hundred dollars bill, I’ll give it to you if you can fold it 50 times. And then it doesn’t seem like it’s too bad, but exponentially, if you could fold that 50 times, it would reach to the moon. 

Todd Yoder: 

So it’s a virtually impossible thing to do. But that’s just exponential growth, the power of exponential growth. And so it’s already having a big impact on our treasury and even how we looked. And to me the biggest thing is looking top down versus bottom up. But its ability to detect anomalies in the data. So it’s by having dashboards, you can see different anomalies. You can see trends that set off the lights for the human to then step in and dig a little deeper. 

Craig Jeffery: 

More of a point of technical interest. Each company is different and you talked about building and running your data lake in-house, some companies are … Will do that some will run it in the Cloud. And there’s the old maxim of buy tactical and build strategic. And then there’s also this aspect of, you still have to do some structure to your data lake. You can’t just throw everything in there, it’s open. Any thoughts on why your company made that type of choice? 

Todd Yoder: 

Yeah. I think you’re exactly right Craig, that’s going to be different depending on the type of company, the type of business that you’re in versus you have the … Are you going to have it on premises right, on prem or are you going to have a web hosted or a Cloud solution? And a lot of that comes down to storage and databases. But what software are you going to use based on your business? What’s your tech stack going to look? Are you going to have a huge … Are you going to have a laundry list of technologies that you’re trying to use? Or are you going to have a few different providers? Are you going to end up buying a lot of technology or are you going to build it? Right? 

Todd Yoder: 

And I think that if it’s on premises, I mean, it’s not all beautiful. It does give you flexibility to do more building, keep your data on-prem but you also have to think about security supervision. So software, if you’re writing it or you’re updating it, if you’re buying software and installing it on-prem, you’re going to have maintenance on the uploading. Implementation’s going to be different on-prem versus in the Cloud. Right? Yeah. So maintenance security I would say too are the biggest ones we want to consider. And then the power, if you’re going to have it on-prem, what operating systems are you going to need? 

Todd Yoder: 

And you’re going to buy power servers to run the softwares that you’re putting on. Whereas the Cloud I think, it just makes it a whole lot easier. Especially if you’re a smaller business, I think Cloud just offers a lot more benefit because out of the box you’re going to get … Have access to a lot of different apps, applications. And you’re going to have storage and processing power, that’s just part of the deal. Right? Subscription business model. So there’s going to be little to no active management by your group, because it’s going to be done in the Cloud. So there’s a lot of benefits I think. From that security you want to be able to trust whatever Cloud solution and the SOC reports and make sure that easy access through web portals. Right? 

Todd Yoder: 

So you can be traveling, especially in a work from home environment, I think there’s … It offers benefits there. You’ve got a backup controls. Right? With a Cloud solution you’re not doing that internally. But I think the big thing is just less maintenance on the user’s part. There’s a lot of great solutions out, a lot of FinTechs out there that do what I’m building in-house on-prem. But the FX risk identification, forward points quantification, but there was just some pieces that were missing that I really wanted to take it to the next level to look at Conditional Value at Risk. 

Todd Yoder: 

A lot of people when you say, CVaR they think of cashflow at risk, but when I say CVaR I’m talking about Conditional Value at Risk, which isn’t just another way to look at risk, to focus more in on the tail risk or understand the tail risk. And looking at portfolio impacts, so the Value at Risk, the Conditional Value at Risk of a portfolio versus just component. And there’s other things, I just wanted to take it to the next level so that’s why I decided to do the build versus buy. But again, like you said, it’s going to be different depending on the company. 

Craig Jeffery: 

Yeah. I think your point about the looking at your risk from a portfolio level, using the concept of exposure and risk management as opposed to doing it at the individual component, individual transaction, look at the overall book or portfolio of exposures makes a lot of sense. And I guess, you’ve already started to explain, what are you wanting to know and measure? You mentioned VaR and CVaR, and I know we’ve talked about other ones. What else are you trying to know and why? Why do you need to know these things? Why might others need to know this type of information? 

Todd Yoder: 

Yeah. And when I say Component Value at Risk, I’m not necessarily referring to transaction level. Let’s say you have a portfolio of cashflow exposures, and then you’re going to aggregate all of those exposures and look at them from the top down. And you have long and short positions and you have different durations. So you have different volumes and different durations of exposure. So that portfolio … And let’s say you’re just looking at 12 months. You can run the Value at Risk or the Conditional Value at Risk on those … That portfolio of exposures. When I say component, it can give you the risk of, okay all my Euro position … Long positions is, I have this exposure. 

Todd Yoder: 

And then you have cross currency, but component, it blocks … It separates out the exposure into each category. When you look at the portfolio Value at Risk, it’s not only taken into consideration the netting of long and short positions, but also the correlation benefit. And so it’s not something that you necessarily want to rely on correlations. Right? That is to me a very dangerous game to play. But it’s definitely something you want to look at especially when you’re looking at exposures that carry to hedge and exposure is extremely expensive. 

Craig Jeffery: 

Very good. Yeah. And you and I had a conversation about The Rise of Carry and you sent me on that book and we spoke with the author of that on this podcast. One of the things that you had shared on the FinTech hot seat panel, you were at a conference and you talk to Taleb who’s famous for the Black Swan. I’d like you to explain what he said and what you take from that in the context of risk management and the tech that we use to fulfill our requirements to manage it. 

Todd Yoder: 

Yeah. Nassim he is one I don’t always agree with what he has to say. But he does say some very … he’s extremely intelligent. His books are great. If you haven’t read his books, they’re actually fun and interesting reads, very informative the way he looks at it. He’s definitely an independent thinker. So there was an economist event where they invited some treasurers to participate in an event. And Nassim Taleb was a speaker, he talks about … a lot about uncertainty and the tail risks. And so my question to him was, if he was the treasurer of a large corporation and had millions or billions of FX risk, when it comes to the quantification, how would he measure, quantify the risk and communicate that out? 

Todd Yoder: 

And his response was, he would not do it. And that’s just the uncertainty of uncertainty. Then he went on to say he would use extreme probability theory, which is very interesting. Basically, the goal is to try to understand the loss severity. Right? And risk management, our job is to better understand and look at the loss distribution and the shape of that curve. So what’s in the tails and extreme probability theory, Nassim did a recent interview on Corona virus, the pandemic. He doesn’t necessarily think was a Black Swan event. But he goes on to talk about extreme probability theory and just looking at those. And that’s one of the reasons I use the Conditional Value at Risk. 

Todd Yoder: 

He’s talking about stochastic modeling in very in depth, because his job is to protect equity firms from extreme events. But even as treasurer something that is not hard to do is Conditional Value at Risk where you’re looking at those tails and you’re not just understanding the typical Value at Risk linear bell curve. But you’re also looking … It allows you to look a little deeper into the nonlinear in the skew. 

Craig Jeffery: 

I think as we come to the close of this discussion about technology impacting risk management, we’ve gone back and forth on a couple areas, I guess, in summary, what are … What do you see as some of the big ideas of the less recognized big ideas that the senior treasury people should take away from this discussion? 

Todd Yoder: 

I think what treasury should take away is, do you want to be in the group that’s watching it happen or do you want to be in the group that’s a part of making it happen? And when it comes to treasury technology, it’s going to be a different role for each treasury group. But I think if you’re top of the house, I think it’s … You want to create the right culture. I think one of the smartest things I‘ve heard is, I heard George Zinn say … From Microsoft say, “Make sure it’s not a…” He said something to the effect of, “Make sure it’s not a know it all culture, but a learn it all culture.” And that just really resonated with me. But like we talked about, it’s going to be different for different companies. 

Todd Yoder: 

The FinTechs are what they’re creating. They’re creating some really powerful tools for treasury and their packaging on the Cloud. And they take care of a lot of like we talked about the maintenance and software updates, and the compute power and all of that’s included. And so subscription-based, so it’s not huge cost to get involved with it. So I would say, the message would be don’t miss the opportunity to explore some of these different technology opportunities to add value to the business. But you have to have the right culture and you have to have the right approach and the right team to build that out. But yeah, the benefits are huge. 

Craig Jeffery: 

You’ve reached the end of another episode of the Treasury Update Podcast. Be sure to follow Strategic Treasurer on LinkedIn, just search for Strategic Treasurer. 

OUTRO: 

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