This functionality simulates different financial scenarios related to fluctuations in currency exchange rates to assist companies in strategic decision-making, budgeting, forecasting, and mitigating financial risks.
Scenario: A retail brand with manufacturing in certain countries and supplier dependencies in others is exposed to significant currency risk due to fluctuations in the exchange rates. The company uses the scenario planning and FX capabilities in the CPM software to understand the financial implications of these changes and plan accordingly.
Solution: The company builds different scenarios within their CPM software. Examples of the scenario could be a 5% increase/decrease in a particular foreign currency, or an unstable country going through a major currency devaluation. This functionality allows the company's management to visualize these what-if scenarios specific to currency valuations and the potential effect on revenues and costs.
Most pure planning & budgeting systems on the market manage currency conversions in a simple table that shows a fixed rate for a specific period of time. For the sake of planning, this satisfies the requirements of the vast majority of organizations. This period is generally monthly. For a currency that is undergoing extreme inflation, monthly averages may be insufficient.
It is helpful to treat currency as a dimension in a planning model if the goal is to use it as a core driver in a forecast, or to compare it to other scenarios. This allows the user to quickly change the currency dimension on any page, and subsequently to place those dimensions side by side on a report. Low dimension products do a poor job at this.