1. Managing Foreign Exchange Risk
Financial Planning for Exporters
January 25, 2012 | Going Global: Partnering for International Growth
Wes Seeger
(980) 386-1899
wes.seeger@baml.com

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3. Why are we here?
“Going Global” has traction
International Outlook
 Overall, 68% of U.S. companies surveyed have some form of foreign market involvement (85% of manufacturers and 51% of services and
commodities companies). As a whole, 56% buy from foreign markets, 49% sell to foreign markets and 31% have operations in foreign countries.
USD billions US Corportate Profits
2,000 50%
1,800 45%
1,600 40%
1,400 35%
1,200 30%
1,000 25%
800 20%
600 15%
400 10%
200 5%
0 0%
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Corporate Prof its
*Source: U.S. Department of Commerce, BEA Receipts f rom Rest of World Ratio
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4. Foreign Currency Markets
 Arguably, global currency markets are the world‟s largest financial market.
USD, bn Average Global Daily Turnover USD bn
Average US Daily Turnover
$4,500 900
$4,000 800
$3,500 700
$3,000 600
$2,500 500
$2,000 400
$1,500 300
$1,000 200
100
$500
0
$-
O-04 A-05 O-05 A-06 O-06 A-07 O-07 A-08 O-08 A-09 O-09 A-10 O-10
1989 1992 1995 1998 2001 2004 2007 2010
Source: BIS, 2010 Source: FX Committee, Volume Surveys, October 2004 – October 2010.
 2010 average daily global turnover in all FX transactions (spot, forwards, swaps and options) estimated at $4.0 trillion.
 Up 20% compared to 2007 (18% at constant exchange rates).
 Daily turnover roughly equivalent to annual world trade in goods and services.
 US market data shows a collapse in volumes in early 2009, followed by a recovery to late 2008 levels.
 The vast majority of transactions take place in OTC market.
 Market participants include multinational corporations, investors, financial institutions and central banks; their heterogeneous views and objectives
contribute to currency volatility.
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5. FX Market Volatility
 Increased business, higher volumes, and more participants leads to currency volatility.
EUR/USD – 2 Year Historical USD/JPY – 2 Year Historical
1.65 115
110
1.55
105
1.45 100
95
1.35
90
85
1.25
80
1.15 75
Jan-08
Oct-08
Jan-09
Oct-09
Jan-10
Oct-10
Jan-11
Oct-11
Jan-12
Apr-08
Jul-08
Apr-09
Jul-09
Apr-10
Jul-10
Apr-11
Jul-11
Jan-08
Oct-08
Jan-09
Oct-09
Jan-10
Oct-10
Jan-11
Oct-11
Jan-12
Apr-08
Jul-08
Apr-09
Jul-09
Apr-10
Jul-10
Apr-11
Jul-11
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6. Global Trends and Best Practices
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7. Trends impacting global companies
 Globalisation
– Treasury operating models are changing from local to regional to global, with a spotlight on increasing
control. Rationalization and consolidation of providers is a key focus.
 Global banking technology
– Increased automation, outsourcing and centralisation of cash and liquidity management. Increased
efficiency and doing more with less.
 Risk management
– Cash is King – the lifeblood of our clients‟ organisations. Who has access to what?
 Market forces – „credit crunch‟
– Increased need to gain control over internal liquidity, decrease dependency on external funding and
manage risk.
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8. Transacting outside of the USD
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9. Why pay in the functional currency rather than in USD?
 Lower Costs, Buying Cheaper
 International suppliers often increase their prices in USD to protect themselves from currency rate movement between billing and payment date
 Since the supplier is taking the currency risk from invoice date to payment date, the supplier often “charges” the buyer for the ability to pay in
USD versus the local currency
 Simply paying in the functional currency improves price transparency and ensures that a wholesale exchange rate is being applied to all
transactions
 Achieve Better Accounting
 Paying in the functional currency would allow a company to know the exact amount of the foreign currency paid to supplier
 Guarantee Promptness
 The functional currency of the supplier will typically post to an account faster as the foreign bank does not have to stop the USD payment for
conversion to the local currency
 Control / Transparency
 Sending the functional currency eliminates over/underfunding an invoice
 Maintain certainty over the exchange rate being applied to funds and the amount of foreign currency being received by the beneficiary
 Retain the ability to manage the Company‟s exposure to fluctuations in the exchange rate and make the decision to hedge
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10. Why price products in the functional currency of the buyer rather
than USD?
 Increases Competitiveness of Pricing and Product
 Pricing in the functional currency allows the product to compete with similar products that are also priced in the functional currency
 In times of USD strength, pricing in the functional currency is more attractive to the buyer
 Increases Potential Buyers
 Products priced in the functional currency are more attractive to buyers unwilling or unable to take currency risk
 Increase Price / Margin
 Ability to increase price or margin on products priced in the functional currency because the buyer is not taking the currency risk
 Since the buyer is unable or willing to take the currency risk, they are often willing to pay more to avoid currency exposure
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11. Managing foreign currency exposure
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12. How do I hedge a foreign currency payable or receivable?
 Hedging allows a company to lock in a pre-determined rate for a future cash flow:
 The most widely used hedging tool is a forward contract
 A forward contract is a legally binding agreement to buy one currency and sell another, for settlement (value) on a specific date beyond spot, at
a rate agreed upon today
 No initial currency exchange, or payment of premium/fee, to initiate a forward contract
 Effectively exchange uncertainty for a known certain outcome
 Best suited when there is a desire to lock in current rate, perhaps because of known foreign currency remarket view or because risk
management goal is to eliminate all surprises
 Protect against “losses” if the currency moves against the underlying exposure
 However, forwards forego any benefit, if currency moves in favor of the underlying
 Forward contracts do require credit approval
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13. When is a foreign currency account appropriate?
 Ideal solution:
 Buying and Selling product in the same currency
 Maintains offices/employees overseas
 International subsidiaries
 Foreign currency accounts provide robust treasury capabilities such as low value wire payment, cross border ACH,
information reporting.
 Use of a foreign currency account, a company effectively protects itself from currency volatility for any amounts where
the volumes of the receivables match the company‟s anticipated payable needs.
.
Key Considerations:
 Opening a foreign currency account abroad- Transaction volumes, payments, receipts, payroll.
 Increase control over bank accounts, automation, minimize idle cash balances.
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14. Documents required to open a foreign currency account abroad
 Certificate of Incorporation or Foreign equivalent
 Bylaws or Foreign equivalent
 Board Resolution
 Drivers License or Passport copies
 Financial Institution agreements
 Country specific documents
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15. Operating on a global platform
Simplify Cross-Border Payments with a Fully Integrated Treasury Platform
• Automate and gain full control over your FX payments
• Achieve convenience and efficiencies
• Reduce risks and the potential for error
• Lower costs
• Centralize reporting
• Leverage multiple payment channels
• FX wire transfers
• Cross-border ACH
• Centrally printed drafts
• Increase internal controls
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16. Closing remarks
 With more and more business being transacted overseas, a company‟s success depends on efficiently operating on a
global scale.
 By thinking, acting and competing globally a company can ensure that it has the right tools and policies in place to
accommodate international growth.
 In practice, this includes but is not limited to the following;
– Transacting outside of the USD
– Putting a policy in place for managing exchange rate risk when appropriate
– Establishing an international platform that is both transparent, easy to use and can accommodate ongoing global
growth
– Consolidating and centralizing global decision making
– Working with a truly global institution and leveraging its footprint and capabilities internationally
• By having the right structure and tools in place, operating outside of the U.S. can be made easy.
• There is not one perfect model for every company. Instead, there are many variations based on common underlying
themes that can be structured to best fit a company‟s specific needs.
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