Meet ERMA – Your Newest Colleague in Finance

Machine learning is quickly becoming adopted and integrated by organizations and could (if not already) be coming to a cubicle near you.

What does this mean for the future of work?

While Machine Learning (also referred to as Artificial Intelligence or AI) could arguably be said to be in its early days. Nevertheless, progressive companies have moved beyond the concept stage and have early stage pro-types up and running performing routine financial and other tasks. Initial AI projects are more rules-based vs. thinking but it is only a matter of time, as AI technology improves, that the machines start doing more “thinking” on assigned tasks.

How will AI work for foreign currency hedging?

Say hello to ERMA, the “Excellent Risk Management Analyst” – a dedicated robot focused on helping a company manage its foreign currency exposure. ERMA can pull data from financial systems and then apply the company’s rules to specific scenarios, for example: IF Euro exposure over 100,000 AND invoice due beyond 30 days THEN buy a forward contract or buy 50% of the exposure; 50,000.

A company can designate the hedging policies and ERMA will follow those rules doggedly.  Once the rules are met ERMA could send an alert text and/or email to the humans for further action or ERMA could even initiate a forward contract purchase automatically if that rule is active.  In version 2.0 ERMA might pull data from outside sources on future expectations of USD vs. Euro rates and then modify the recommended coverage percentage on the forward contract.  So if the market consensus is that the dollar is definitely going to weaken against the Euro ERMA could recommend covering the Euro need at 75% or 100% with a forward contract vs. 50%.  But if the dollar is expected to strengthen over the defined period ERMA would recommend only say a 25% coverage ratio with the balance of Euro purchased as a Spot deal when the invoice comes due.

To the extent that thinking can be broken down to discrete lines of code ERMA can help a financial team manage its foreign currency risk.  AI will take this a step further over time as more and more inferences and decisions can be made with larger data pools.  ERMA will easily handle massive amounts of data while never taking a lunch break or calling in sick.  Freeing staff from menial tasks and enabling humans to focus on other higher value-added activities.  Are you ready?

Andrew Woelflein Chief Strategy Officer Tempus

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