Cambridge Risk Management Strategy

Simple yet sophisticated approach to optimizing financial performance

[Date][Location][NAM or Trader]

Risk Management Solutions

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ECB DOUBTS PRESSURE EURO

Are we heading to a deflationary recession?

MARKET REGAINS FOOTING, NOT FAITH

EURO ZONE IN FULL BLOWN SOVEREIGN DEBT CHAOS

The Great False Choice

Stimulus or Austerity?

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FX Risk Management

Income Statements

Balance Sheets

Cash Flow Statements

Liquidity

Earnings Volatility

Financial Strength

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As a global boutique brokerage of risk solutions, we provide an institutional level of service to each of our 32K corporate customers.

We deliver sophistication and simplicity, seamlessly working to minimize the impact of exchange rate fluctuations on the health of your enterprise.

Overview | Process | Common Myths on Hedging | Hedging Ratios

FX Risk Management

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The Foreign Exchange Hedging Process


FX Risk Management


Trading on the spot market is conservative

Hedging limits flexibility and available choices

Hedging is complicated

Hedging rationale should be consistent with reducing the overall level of risk within your organization and shouldn’t just transfer one form of risk for another. Hedging is Risk Management.

Common Myths About Hedging

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Options are inherently risky and expensive

Hedging requires the implementation of hedge accounting and complicates financial statements

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FX Risk Management


Optimal Hedge Ratios

Never hedge 100% - over-hedging limits flexibility and available choices

Psychologically optimal ratio is 50%

Typical Risk Averse Corporates hedge 70 to 85% of known requirements

The narrower the margins, the higher the ratio

The wider the margins, the lower the ratio

Known and contracted requirements vs. forecasted requirements

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FX Risk Management

Market Orders | Forward Contracts | Forward Contract Types | Natural Hedge Solution | Limitations of Traditional Hedging

Think of these products not as tools themselves but simply as a means of execution for deploying your chosen strategy

Market Orders

Working with a risk management specialist… Will help you identify market levels of support and resistance, thereby

improving the performance of your orders

Can be employed to execute spot, forward, vanilla options and zero cost options

Take Profit Limit Order (Bid) Stop Limit OCO – Order Cancels Order Trailing Stop Limit

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FX Risk Management


Forward ContractsProvide one with the ability to set an exchange rate today and settle in the future

Benefits Deliverable and non-deliverable

Any date – any amount

Extremely liquid

Multiple types with variant drawdown alternatives available

No upfront costs or fees

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FX Risk Management

Forward Contract Types

Open

Closed

Window

Par

Non Deliverable (NDF)

• The most flexible of all in terms of cash flow. Access your funds at any point at the same exchange rate.

• The most efficient in terms of pricing, though the rate may change slightly if you deliver cash flow prior to expiry.

• The flexibility of open with the price efficiency of closed.

• One rate across multiple expiries and contracts. True fixed rate and date pricing.

• A pure hedging vehicle that allows you to hedge currency risk without being required to make a payment at expiry.

Can be deployed in emerging markets with currency controls or in situations related to risks of an ongoing nature


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FX Risk Management


The FX Swap:Allows you to convert available cash into the currency you require today, while eliminating the currency risk inherent in transferring it back at a later date

Involves the simultaneous execution of a spot and forward trade in opposite directions (one buying and one selling)

Eliminates the bid-ask spread of booking two trades at the same time

The Challenge: Natural hedging comes with risks that cash flows and dates don’t always coincide, exposing your firm to liquidity and interest rate risk

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FX Risk Management


Forwards and Swaps, Regardless of Their Type, Are ObligationsIf you execute one of these “hedges,” and the market moves in your favor, there is no ability to participate in that market movement.

Hedging is too risky

I never know when I will need my funds…

Whenever I book a forward, the market

goes the other way…

I don’t like being stuck with one rate…

I don’t like to put all my eggs in one

basket…

If you’ve ever said…

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FX Risk Management


What you’re really saying is:

You need flexibility, choice, market participation and a

hedge that actually works for your business model.

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Hedging Foundation | Hedging Intelligence | Zero Cost Options

Vanilla Options

Fundamentally different from forward contracts

Bestow a right for which you pay a fee or premium

Unlimited ability to participate in a favorable market movement

The Foundation of Options Hedging

Can be rolled into a forward contract at expiry (premium management)

Analogous to purchasing home insurance

Can be combined to create a more intelligent hedge

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Hedging

The More Intelligent Hedge

Zero Cost OptionsProtect against downside risks, participate in favorable market movements with no fee or premium

Really just combinations of bought and sold vanilla options

Bought options bestow protection

Sold options limit upside participation in some way

The premiums are netted (and must balance) in order to create a zero cost structure

Can be uniquely tailored to your organization’s business and financial requirements

Foundation | Hedging Intelligence | Zero Cost Options

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Hedging

Zero cost options vary in four main ways:

1. Efficiency of protection2. Level of upside participation3. Sensitivity to volatility4. Risk vs. reward

Protect against downside risks, participate in favorable market movements with no fee or premium

Can be uniquely tailored to your organization’s business and financial requirements

Can still achieve full cash flow flexibility around the timing of your cash flow while protecting your budget without compromising your ability to participate in favorable market movements

Value of Zero Cost Options

Foundation | Hedging Intelligence | Zero Cost Options

Customized Strategy

Zero cost options are completely customizable, uniquely tailored to fit one’s specific needs

Customized Strategy | Supporting Your Risk Management

Allows for a best case and worst case price level at which to exchange foreign currency

Allows for full downside protection from an unfavorable market movement and 50% upside participation in a favorable market movement

Provides a better-than-market initial hedge rate and 50% protection from an unfavorable market movement

Allows for full downside protection from an unfavorable market movement via an initial forward, which converts to a vanilla option if certain market conditions are met

Customized Strategy

Zero cost options are completely customizable, uniquely tailored to fit one’s specific needs


Is a pre-funded product that allows you to buy or sell foreign currency at a targeted level and receive an additional enhanced interest-based cash payment at a pre-determined date.

Allows for full downside protection from an unfavorable market movement via an initial forward, participation to a certain pre-set exchange level in a favorable market movement and an improved forward rate if certain market conditions are met

Allows for full downside protection from an unfavorable market movement via an initial forward and participation in a favorable market movement to a certain pre-set exchange level

Allows for a better-than-market downside protection rate that ceases to exist if certain market conditions are met

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Hedging Strategy

Accounting Ease

Hedging Policy and Strategy Consultation

Collateral Flexibility

Leading Market

Forecasting and Analysis

We provide flexible trading and credit terms to facilitate trading and settlement of transactions without impairing working capital

We provide full transactional reporting, marked-to-market valuations and verbiage for presentation in financial statements

We work to develop a framework that is aligned with your organization’s financials goals and planning

We conduct forecasting and analysis to help you make effective business decisions. While no-one can peg the market, we can manage volatility and allow for probabilities

Supporting Your Risk Management


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19Thank you for your time.

Superior service, FX product availability and pricing

Online trading and payment system integration with best in class security and multiple approval levels

Market leading consultative strategy and ongoing support with hedging strategy development and execution

Flexible credit terms that reflect your business needs

Organizational culture and expertise to achieve superior business results

Cambridge’s Commitment

Cambridge Risk Management Strategy

Economy & Finance