The Context

Pharmaceutical companies operating in the parallel trade market face very tight gross profit margins often in single digit % terms. Even moderate FX volatility can wipe out entire margins on currency exposed transactions.

Most companies hedge these exposures using a combination of forward contracts and FX options, but the complexity of managing option expiries, premium costs, and stress testing potential market movements presents challenges – especially when managed in Excel.

Failure to accurately track exposures, hedge effectively, understand potential outcomes at Option expiry dates or anticipate a margin call can impact fulfilment committed orders the business has and lead to erosion of profit margin and loss of market share / competitive edge.

The Solution

Currency Risk Management and Execution

Smart provided comprehensive support on understanding the business, existing challenges, key objectives and suggested appropriate hedging solutions tailored to meet the clients need and risk appetite. However, the HOF needed a tool to model scenario analysis of existing and newly proposed trades, as well as a simplified way of managing these on an ongoing basis.

SmartHedge Implementation

SmartHedge was used as a key tool during qualification and closing, directly addressing the pains raised by the HOF and allowing them to proactively manage exposure, stress test potential FX movements, and justify option usage decisions to the board.

Key features deployed:

• Exposure Tool: Simple visibility of open positions across both forwards and options, aligned to FX policy
• Contract & Options Management: Full lifecycle view of forwards and options, with mark to market and lifecycle reports automated
• Credit Line Monitoring: Oversight of credit facility utilisation across multiple counterparties, including outstanding notional values and credit headroom / mark to market stress testing reports
• Stress Testing: Scenario modelling on market movements and the impact on option outcomes at expiry, anticipated cashflows at settlement dates, margin call anticipation and overall performance vs budget rates
• Board Reporting: Custom reporting on policy adherence, overall hedged amounts, split between counterparties and product type and margin call possibility

Onboarding Time

Smart collaborated with the HOF over a few calls to upload historical trades, model options and forwards, and simulate multiple current / proposed outcomes. A policy report was configured to flag policy adherence and overall performance. The HOF found SmartHedge a simple, effective and valuable tool during initial trade discussions and saw great benefit in the system simplifying and streamlining his role heading forward, giving him valuable insights and reducing the time he spent compiling analysis and reports.

The Challenge

The Head of Finance was concerned with:

• Ensuring strict adherence to FX policy across both forwards and options and understand possibilities for restructuring and placing new trades / revising hedging strategy, with clear audit trails for EOY
• Providing timely and accurate visibility of open FX exposures, broken down by currency and instrument type
• Understanding the impact of market movements on their margins and budgeted rate, particularly when using options
• Manage their credit facility utilisation, including potential offside risks with multiple hedging counterparties
• Stress test their combined forward and options hedges for potential triggers of margin calls or modelling of undesirable settlement outcomes
• Delivering clear, policy adherent reporting to board members monthly

Historically, the company struggled with:

• Fragmented deal tracking between options and forwards
• Manual recording of trades across multiple spreadsheets and brokers, with complexity and difficulty modelling their current situation and potential outcomes
• No central view of exposure, credit utilisation or policy compliance
• Stress testing only carried out retrospectively, after adverse movements occurred or carried out using rudimentary analysis on Excel

Why it worked

By using Smart’s existing provision alongside SmartHedge Pro, the client:

• Reduced time spent reconciling option positions and forwards by several hours per week
• Gained automated visibility on credit line usage and margin call risk, across all counterparties
• Used stress testing to reshape option hedging strategies ahead of market events, giving greater clarity on their current situation and potential obligations
• Created a policy audit trail that satisfied board reporting and EOY obligations
• Made data driven decisions to prioritise hedging where margin erosion was most critical, rather than spread cover evenly or take opportunistic, rate/ product driven hedging

Key Takeaways for Pharmaceutical Businesses

1. FX risk is significant: With very thin margins, tracking and stress testing are essential to maintain operational and competitive viability.
2. Options require oversight: SmartHedge helps bring clarity and control to complex options structures, ensuring clients can understand potential outcomes and adapt accordingly.
3. Policy orientated strategy is now standard: Visibility and board level confidence are essential in a regulated, competitive and volatile market.