Currency Hedging Presentation

[object Object],[object Object],Protecting XYZ profits from Foreign Exchange (FX) Volatility

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Agenda

The FX risk mechanism As the exchange rate rises, the value of the contract rises. Conversely, as the exchange rate falls, the value of the contract falls. EUR/USD USD/CAD What is FX Risk? Impact on contract + - Exchange Rate ( foreign/home ) Exchange Rate at Time of Contract

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],FX Risk: Reality

[object Object],[object Object],[object Object],[object Object],“ Forex Markets Show Companies Need Better Hedging”, WSJ -- July 28, 2010 “ Currency Wars Seize IMF Stage”, Institutional Investor -- Oct 7, 2010 Economist, Oct 16 th -22 nd , 2010 FX Risk in the News

[object Object],[object Object],[object Object],FX Risk: Volatility

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Defining FX Risk

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],So what is hedging? Handling FX Risk

Impact on contract + - Exchange Rate (foreign/home) Effect of Exchange Rate on contract value with hedging A perfect hedge moves opposite to the contract value, offsetting any changes in contract value. Proper hedging does NOT involve prediction or trend analysis, and CRM does not do so. What is Hedging? Contract Value vs. Exchange Rate Hedge Value vs. Exchange Rate

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Hedging Methodologies

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],With 13% 12-month Volatility, Value at Risk in 60 days is $3,200 (6.4%) EUR/USD XYZ Case Study #1

Through hedging, the contract is essentially unaffected by FX rates Exposure is $50,000 USD Hedge is 5 long EUR puts/USD calls @ 1.4020 5 short EUR calls/USD puts @ 1.4030 Max net loss -$185 + $250 fee = $435 (.8%), compared to $3,200 (6.4%) Value at Risk XYZ Case Study #1, cont’d

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],With 13.8% 12-month Volatility, Value at Risk in 60 days is $3,625 (7.25%) AUD/USD XYZ Case Study #2 (AUD/USD 0.98 as of 11/18)

Exposure is $50,000 USD Hedge is a short future at 1.0080 Max net loss -$375 + $250 fee = $625 (1.1%), compared to $3,625 (7.25%) Value at Risk XYZ Case Study #2, cont’d Through hedging, the contract is essentially unaffected by FX rates

Caution: Value at Risk underestimates risk ,[object Object],[object Object],[object Object],[object Object],Vertical scale is number of days exhibiting a % change Red line is a normal distribution Blue line is one year of actual EUR/USD data Value at Risk

If you were a banker, would you lend to Company A or Company B? Company A: earnings of $US500k / month, unhedged (trailing 20 months, EUR/USD) Other Benefits of Hedging Company B: earnings of $US500k / month, hedged (trailing 20 months, EUR/USD)

[object Object],[object Object],[object Object],[object Object],Hedging is Affordable

[object Object],[object Object],[object Object],[object Object],[object Object],Sleep at night, knowing your profits are insured against currency risk Getting Started with Hedging

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Getting Started with Hedging

Getting Started with Hedging ,[object Object],[object Object],[object Object],[object Object],Sample $250,000 contract ,[object Object],[object Object]

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],A Complete Hedging Program

Myths and Missteps ,[object Object],[object Object],[object Object],The performance of our FX top trades this year has been unsatisfactory- Goldman-Sachs, Dec 1, 2010

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Summary

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],The CRM Team Correspondents: Europe, Switzerland Martin Horn UK Brian Keaveny Australia John Levisohn

Contact: Paul Stafford Office 1.406.626.1546 Email: [email_address] Website: www.CurrencyRiskManagement.com Contact Information

Scott Burke President , First Security Bank Gerald McConnell CEO , Spectrum Products Robert Bell Partner , Reep, Bell, Laird PC Michael Harrington Assistant Dean , U of M Business School Advisory Board

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Banking

Currency Hedging Presentation

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