Washington, DC 1201 New York Ave NW | Suite 300 Washington, DC 20005 800.843.2497 Los Angeles 8383 Wilshire Blvd | Suite 330 Beverly Hills, CA 90211 855.606.8346 New York 385 Fifth Avenue | Suite 1500 New York, NY 10016 855.778.2022 www.TempusFX.com Proud member of NASBITE Hedging Foreign Currency Risk in International Trade & Future Developments April 11, 2019
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Washington, DC1201 New York Ave NW | Suite 300Washington, DC 20005800.843.2497
Los Angeles8383 Wilshire Blvd | Suite 330Beverly Hills, CA 90211855.606.8346
New York385 Fifth Avenue | Suite 1500New York, NY 10016855.778.2022
www.TempusFX.com
Proud member of
NASBITE Hedging Foreign Currency Risk in
International Trade & Future Developments
April 11, 2019
2
Today’s Agenda
Foreign Exchange (FX) Volatility
Why FX Volatility Matters
Why Exporters Should Consider FX
FX Hedging Terminology
FX Hedging Case Studies
Future International Trade Trends
FX Resources
3
Foreign Exchange (FX) Volatility - what it is and what causes it
FX Volatility: Fluctuations in Value between two different currencies
4
Foreign Exchange (FX) Volatility - Big Jolts Too
Swiss National Bank abandoned Euro peg in
Jan 2015 - Swiss franc strengthened 30%
UK Brexit vote in June 2016 drove GBP
down 10% in one day, a 31 year low
Mexican election June 2018 – MXN peso
down 16%
5
British Pound (GBP) Volatility 2018
5
Pound dropped -13% in 2018 against USD
6
British Pound (GBP) Volatility Q1 2019
6
Pound moved +6% against USD in Q1 2019
7
EURO (EUR) Volatility 2018
EUR moved -10.3% against USD in 2018
8
EURO (EUR) Volatility Q 1 2019
EUR -3% movement against USD in Q1 2019
9
Other Currencies in 2018 Dollar Gains
+9.3%
+15.9%
+11.1%
10
Other Currencies in Q1 2019 Dollar Gains
+3.9%
‐4.0%
‐3.8%
11
Foreign Exchange (FX) Volatility – why it matters
FX volatility, if not mitigated, may eat
into companies’ bottom-line profits
Importers that pay overseas suppliers
in FX have increasing costs if US
dollar weakens
Exporters receiving FX have declining
profit if US dollar strenghtens
12
FX Exposure in Import / Export Transactions
USD
• Good for US Importers…foreign goods less expensive
• Bad for Exporters…US goods more expensive for foreign buyers
1.10
1.05
1.15
1.20
• Bad for US Importers…foreign goods more expensive
• Good for Exporters…US goods less expensive for foreign buyers
Rate
13
Lego Negatively Impacted by FX Volatility
January to June 2018 Results
“Net profit fell 10% to three billion Danish kroner ($468 MM), while Sales declined 4.6% to 14.2 billion kroner. The company attributed much of that weakness to currency moves. The US dollar weakened significantly against the kroner during the period, reducing Lego’s overseas sales after being converted into its home currency. Excluding foreign exchange moves, revenue was flat for the first six months of the year.”
September 5, 2018Page B3
14
FX Volatility – #1 Cause of Negative Impact on Corp Earnings
15
Why Exporters Should Consider Invoicing in both US$ & FX
16
Managing FX Risk: Hedging
Toolbox to manage FX Risk:
• Fixed Date Forwards
• Window Forwards
• Market Orders
• Spot
• Holding Balances
17
Hedging is simply Insurance to protect profit margins
• Would you drive your car without insurance?
• Would you buy a house without insurance?
Hedging Foreign Currency Risk is a prudent tactic to protect profit margins
18
Focus on your company’s business not speculate on FX
Is your job to bet on foreign currency markets…
…or is it to protect your company’s profit margin?
19
Hedging Terminology – Fixed Dated Forward
Fixed Date Forward • Binding contract to Buy/Sell currency at a rate set today• Forward points added• Future delivery out to 12 months on a specific date:
– EUR 100,000 @ 1.1823 Value Date December18, 2019
Advantages• Set FX rate today and take delivery in future • Secure profit margins by knowing exact cost of FX today• Preserve cash flow until value date• No fee to book a Fixed Date Forward
20
Hedging Terminology – Fixed Date Forward In Action
Useful when exact amount and value date are certain
EUR 100,000 Fixed Date Forward booked today @ 1.1300 with Value date of Nov 31
November 31 client takes delivery of EUR 100,000 and pays USD 113,000
21
Hedging Terminology – Window Forward
Window Forward • Binding contract to Buy/Sell currency at a rate set today• Forward points added• Future delivery out to 12 months• Draw funds multiple times/amounts in a defined “Window”:
– EUR 100,000 @ 1.1901 between Oct 31 and Dec 30, 2019
Advantages• Set FX rate today and take delivery in future• Secure profit margins by knowing exact cost of FX• Match cash flow to exact time FX is needed• Flexibility to draw funds multiple times to match needs• No fee to book a Window Forward
22
Hedging Terminology – Window Forward In Action
Flexibility to draw funds multiple times & in varying amounts to match needs
EUR 100,000 Window Forward booked today @ 1.1500 with Final Value Dec 31 and three month window opening Oct 1st
October 10th client takes delivery (“drawdown”) of EUR 20,000 and pays USD 23,000
November 15th client takes delivery of EUR 10,000 and pays USD 11,500
December 17th client takes delivery of EUR 30,000 and pays USD 34,500
December 30th client takes final delivery of EUR 40,000 and pays USD 46,000
23
Hedging Terminology – Par Forward
Par Forward• Series of forwards with different settlement dates but a
common exchange rate – i.e. EUR 1.1456 for all forwards
Advantages• Simplified / streamlined accounting• Set FX rate today and take delivery in future• Secure profit margins by knowing exact cost of FX• Preserve cash flow until value date• No fee to book a Par Forward
24
Hedging Terminology – Forwards
PremiumThe amount by which the forward price exceeds the Spot price
Value DateAlso referred to as the maturity date. The delivery date of funds traded; for spot trades it is normally two days after the transaction date. Forwards may have value dates out to 12 months. Most forwards are typically out to 6 months.
Forward Deposit (Margin)Portion of Forward placed on deposit at time forward is booked. Ranges from 4% to 15% depending on forward value date. • 0 to 3 months 4% 5%• 3 to 6 months 6% 10%• 6 to 12 months 8% 15%Credit lines may be used for forward deposits – if company qualifies.
25
Hedging Terminology – Forwards Continued
Drawdown To pull FX funds from a total amount either in part of in full
ExposureAmount a company stands to lose in a FX position
Forward Points Pips, based on interest rate differentials, added to or subtracted from the current exchange rate in order to calculate a forward price• Spot 1.1500 Forward 1.1525 (25 Forward points)
Hedge Ratio Value of a position protected through the use of a hedge compared with the size of the entire position itself. I.e. 50%, 75% or 100%
26
Hedging Terminology – Market Order
Market Order (aka “Standing Order”)FX risk management tool used to place a buy or sell order once the Spot rate reaches a pre-defined level. Valid 24 x 7
Stop Loss Order to buy / sell at a pre-defined level in order to limit a lossEUR at 1.17….Set a Stop Loss Market order for 1.19
Take Profit Order to buy / sell at a pre-defined level in order to secure a profitEUR at 1.17….Set a Take Profit Market order for 1.15
One Cancels Other (“OCO”)Combination of both a Stop Loss and Take Profit order. If either rate is achieved the other market order is automatically cancelled
27
WINDOW FORWARD
Case Study #1:Receiving Foreign Funds
A seafood distributer based in
New York was contracted to
supply a few chain restaurants in
Canada with fresh seafood. The
contract was negotiated in
Canadian dollar (CAD), meaning
the US‐based client would receive
264,000 CAD over the course of 9
months. The client expected to
receive 25% within 4 months and
the remaining 75% no later than
10 months.
ChallengeThe client had surplus capital and did not anticipate needing to use the funds until 2 months after receiving them. Therefore, the client wanted to ensure that they received max value for their CAD before converting to USD.
StrategyIn order to help the company maximize their return, a strategy was drawn up which involved using 2 window forwards with a delayed open date to repatriate the funds back to USD.
– 66,000 CAD (25%) Window forward opening in 3 months and closing 5 months out
– 198,000 CAD (75%) Window forward opening in 9 months and closing 11 months out
Outcome• Pushing back the open date on the Window forwards
allowed the client to take advantage of the interest rate differentials between USD and CAD and to gain a better exchange rate
• The client maximized their USD receivables versus converting at the current bid‐side Spot price
28
WINDOW FORWARD – In Action
Case Study #1:Receiving Foreign Funds
A seafood distributer based
in New York was contracted
to supply a few chain
restaurants in Canada with
fresh seafood. The contract
was negotiated in Canadian
dollar (CAD), meaning the
US‐based client would
receive 264,000 CAD over the
course of 9 months. The
client expected to receive
25% within 4 months and the
remaining 75% no later than
10 months.
Client books two window forwards now to Sell:• CAD 68K @ 1.32 – Opens 3 months closes 5 months• CAD 198K @ 1.34 – Open 9 months closes 11 months
• Month 4 CAD 68,000 received and client converts to get USD 51,515
• Month 10 CAD 198,000 received and client converts to get USD 147,761
Alternative is to do nothing and then sell CAD at Spot rate when it is received:
• Spot @ 1.34 at month 4 converts to USD 50,746
• Spot @ 1.36 at month 10 converts to USD 145,588
Gain: USD 2,942 by using Window Forwards vs. Spot
Window Forwards help exporter by improving their overall profit margin
29
MARKET ORDER & WINDOW FORWARD
Case Study #2:Optimistic Outlook
An antiques dealer based in
Georgia has followed news
surrounding the Brexit
referendum election in Britain.
Through Tempus’ insights, the
client came to understand that the
British pound (GBP), and by
extension the company’s budget,
was poised to be strongly
impacted by the results of the
election.
ChallengeThe client estimated their currency exposure for the year. The client believed the rate would move in their favor and wanted to capitalize on a positive market move, but did not want to tie up the company’s cash flow in purchasing the funds in full.
StrategyAfter evaluating the company’s risk tolerance it was decided to use a combination of take‐profit and stop‐loss market orders.
– 55,000 GBP (100%) Take‐profit and Stop‐loss market orders
– 55,000 GBP (100%) Window forward opening after the market order hits and closing 12 months out
To avoid tying up the company’s cash flow once the market order hit, the order was rolled into a window forward for future delivery. This allows the client to drawdown the funds at the amount and time needed throughout the year.
Outcome• Combined strategy enabled client to take advantage of ideal FX
rate saving money when the Take Profit market order hit• Preserved cash flow by rolling the Take Profit market order into
a Window Forward for future delivery• Avoided massive market volatility ahead of Brexit election
30
MARKET ORDER & WINDOW FORWARD – In Action
Case Study #2:Optimistic Outlook
An antiques dealer based in
Georgia has followed news
surrounding the Brexit
referendum election in
Britain. Through Tempus’
insights, the client came to
understand that the British
pound (GBP), and by
extension the company’s
budget, was poised to be
strongly impacted by the
results of the election.
Client places Stop Loss & Take Profit Market orders. GBP at 1.50 to USD. Stop Loss at 1.55 and Take Profit at 1.35
Brexit Passes and Pound Collapses down to 1.31
Tempus buys GBP @ 1.35 on behalf of client
Client doesn’t need GBP immediately so GBP rolled into a window forward out to 12 months
Clients annual GBP is secured and as GBP is needed they drawdown the required amounts and pay at 1.35 rate throughout year
31
Hedging Wrap Up
32
International Trade— Future Directions
Change - Block chain, Smart contracts (IoC), Artificial Intelligence (AI), Machine Learning, Crypto Currencies, Open APIs, Internet of Things (IoT), and Real Time Payments
International Trade Evolving - Commonwealth Bank of Australia - Experiment shipping 17 tons of Almonds from Australia to Germany tracked on the platform including IoT, Smart contracts, and block chain
FinTech Disruptors - Tango Trade “Leverages block chain and smart contracts to enable SMEs to import and export with confidence” – Challenger to Bank LC services
Bank Consortium Partnerships - We Trade A consortium of 9 European Banks offering “Block chain based international trade platform and smart contracts” to facilitate European trade . Digital “one stop” shop for trade, finance, and payment based out of Dublin
GOALS: SPEED SECURITY TRANSPARENCY COST FRICTION
33
International Trade— Future Directions “Reality”
Crypto Currency – 2018 Price Collapse
75% Drop since December 2017!
34
Int’l Trade - Future Directions: The Incumbents Respond
SWIFT – Launched Swift GPI to increase transparency into location of payment. Identifies “bottleneck” financial institutions. Payments now moving much faster.
Same Day ACH – Live for payments under $25,000. Expanding to $100,000 over next couple of years.
Banks – Launching own initiatives and partnering where it makes business sense. Backing technologies that show promise.
Digitization - Migration of all incumbents’ business processes and client experience to digital in order to streamline operations, reduce friction, and improve client retention
Incumbents are not waiting for “Challenger” FinTechs to displace them; they are pursuing their own innovation initiatives which incorporate elements of the new technologies
35
Why SMEs should consider a Non-Bank FX Specialist vs. Bank
Market Insight – FX specialists dedicate extensive time and resource analyzing the currency markets and then sharing these insights with clients to help them time FX transactions – a key tactic to reduce the negative impact of volatility and lower costs.
Savings – Banks typically set a very high FX rate for SME clients – often double to triple what an FX specialist charges. Additionally, there is no room for an SME to negotiate the FX rate with the bank.
Technology – FX specialists focus on providing user-friendly, secure, and innovative client-facing technology whereas banks, with a much broader product range to support, have limited FX focus in their SME client facing systems.
Service - FX specialists offer more personalized service because of the focus exclusively on FX and international payments. Customer Dealers take the time to understand each clients’ business and then to craft specific FX solutions to meet client requirements.
36
FX Hedging Videos Resource – Animated
Forward Video
Window Forward Video
Market Order Video
37
FX Monthly Report – Resource to Interpret Currency Markets
38
FX Market Monthly Report
Monthly FX Report
39
FX Glossary – Keeping the jargon clear
Glossary of FX Terms
40
WINDOW FORWARD
Case Study #3:Machinery Purchase, Limited Liquidity
A steel wire manufacturer based
in Texas purchased a large piece of
machinery from Germany for
1,600,000 Euro. The vendor gave
the client flexible payment terms
over the course of one‐year: an
initial deposit of 10% was due,
30% was due between 4‐6
months, and the final 60% was
due between 10‐12 months.
ChallengeThe rate of exchange was extremely favorable to the client at that point in time, but this was an especially large purchase for the client and they did not have the funds to purchase the machine outright. The client also wanted to figure out if there was any cost advantage to paying the invoice in foreign currency versus USD.
Outcome• The client locked in the favorable Spot & took advantage of Forward
rates now for future delivery• Preserved cash flow to pay throughout the year vs. buying all at Spot • Saved an additional 4.0% by paying in EUR vs USD
StrategyAfter performing a cost comparison (USD v. EUR invoice amount) it was determined that the USD invoice was padded with an extra 4% ‐ common practice used to protect against currency risk. Client bought Spot for initial deposit and phased the other two payments with Window Forwards
– 160,000 EUR (10%) Spot transaction– 480,000 EUR (30%) Window forward opening in 3 months and
closing 6 months out– 960,000 EUR (60%) Window forward opening in 10 months and
closing 12 months out
41
PAR FORWARD
Case Study #4:Recurring Monthly Payments
A medical equipment supplier
based in Nevada had to make
structured payments of 11,500,000
Japanese yen (JPY) every month to
fund a new office in Japan. The
client previously used a well‐known
bank to manage their international
wires, but found the bank to be
reactive, as opposed to proactive,
with little understanding of how
their business actually operated.
ChallengeFor accounting purposes, it was important for the client to pay the same US dollar (USD) amount for the 11,500,000 JPY they needed to send each month. However, the client did not have the liquidity available to purchase the entire year’s worth of JPY into their holding account.
StrategyIn order to help better manage the company’s budgets the client decided to hedge their annual exposure with Par forwards.
– 11,500,000 JPY (100%) 12 Par forwards closing at the beginning of each month for 12 months out
– Locked in total of 138,000,000 JPY
Outcome• Simplified accounting records• Took proactive control of budget• Locked in good rate now for future delivery throughout the year saving
money• Preserved cash flow
42
FIXED-DATE FORWARD
Case Study #5:Pre‐Priced Parts, Dollar Weakening
An automotive parts supplier
based in Illinois placed an order
for parts from their vendor in
Mexico. The client negotiated the
price for 8,900,000 Mexican peso
(MXN) then priced the parts in US
dollar (USD) for resale. Through
our proactive monitoring of the
situation and Tempus’ own
forecasts, the client realized that
the MXN showed little sign of
reversing its strengthening trend
against the USD.
ChallengeThe full amount owed was due at a pre‐specified date 2 months out and the MXN had consistently strengthened against the USD, eating away at the client’s expected profit margins. The client didn’t have the cash on hand to buy the full 8,900,000 MXN outright.
Outcome• Protected remaining profit margin• Preserved cash flow until value date two months out• Established better pricing strategy for future business
StrategyIn order to protect the company’s remaining profit margin it was decided to use a fixed‐date forward, to avoid any potential further losses to the company’s profits that would arise from the MXN continuing its appreciation against the USD.
– 8,900,000 MXN (100% hedge) Fixed date forward valued at a pre‐determined date 2 months out
– Additionally, a reasonable and competitive product pricing strategy for future orders was implemented so that the client could maximize profitability for each unit sold while taking into account potential market rate fluctuations
Washington, DC1201 New York Ave NW | Suite 300Washington, DC 20005800.843.2497
Los Angeles8383 Wilshire Blvd | Suite 330Beverly Hills, CA 90211855.606.8346
New York385 Fifth Avenue | Suite 1500New York, NY 10016855.778.2022