Implementing Best Practices for FX Paymentsp g yNovember 7th, 2011

Stephen Kuhl, CFA

Director: Client Mgt. and Trading

American Express FX International P t

Bradley D. Larson, CTP

VP Global Treasurer

Claire’s StoresPayments 

Session Overview

FX International Payments and Claire’s Stores

International Trade Trends 

Overview of Currency Markets

FX Checklist

Best Practices

Q & A

2

3333

American Express Overview

Solid credit ratings

New enterprise growth division

World class brand

Breadth and depth of U.S. businesses

2010 FULL YEAR RESULTS

REVENUE $

Enriching lives

$27.8 billion

NET INCOME $4.1 billion

Global partnerEnriching lives and building 

business success  CREDIT RATINGSFitch: A+ DBRS: A (High)

Heritage of service culture and sustained by 

innovation

Next generation payment platforms

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Accelerating Growth of  FX Related Activitiesg

As part of the Enterprise Growth Group, the Global Payment Options organization was formed to develop new payment forms beyond charge g p p y y gand credit and to scale our foreign exchange and international payments businesses.

Rich Heritage in Foreign Exchange & International 

Payment Products

New Payment Products and Services

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Overview of Currency Markets

• Continuous 24 hour a day basis worldwide

• London and New York are most prominent centers of activity

C k t t l li id d t t• Currency markets are extremely liquid and transparent

• U.S. Dollar is most liquid currency followed by the Euro

• Majority of currency trade with a standard  two day settlement

• Majority countries floating exchange rates but a minority are fixed relative to the U.S. Dollar

Research: International Trade Tracker

• 1,500 online Interviews with SME business owners/leaders

• Research carried out in December 2010

• Research conducted in three countries• UK – 500 interviews

A li 500 i i• Australia – 500 interviews• United States – 500 interviews

Source: American Express conducted online interviews with 500 US SMEs to understand their attitudes on trade, risk management and currency issues. The research survey was conducted by Redshirt Research during December 2010 and January 2011. The poll has a margin of error of +/‐6 1% f lt f 50% t 95% fid t li it ithi th l6.1% for a result of 50% at 95% confident limits within the sample group.

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SME’s Largest Concerns When Trading Internationally

40%37%

31% 31%31% 31%

25% 24%22%

20%17%

11%

6% 7%

7

Reasons Why Companies Do Not Manage Financial Risk

Base: Companies not using a foreign exchange specialistBase: Companies not using a foreign exchange specialist36%

30%

26%

15% 14%

4%

I don't believe we  I am aware of the  I have not  I have considered  I am aware there  I thought only make enough international 

transactions per annum

benefits but believe the extra hassle (i.e. time, research etc.) outweigh the 

considered it before

it before but am not sure of the 

benefits

are benefits however I am not sure what type of organisation can  help me manage 

g ylarge corporations would benefit from managing their 

risks

8

gbenefits

p gthe risks

Reasons Why Companies Do Not Manage Financial Risk

Currencies Used for  Reasons for Only Invoicing Invoicing Purposes in US Dollars

Both, 27%

66%

US Dollars only, 

38% 34%28%

22%y,

64%Local currency only, 9%

22%

4%For ease and convenience

To minimise risk

Less administration

Saves time Customer preference

Other

9

convenience with my bank

risk administration preference

A Checklist for Selecting a FX Provider

What is the capital strength of the provider?

Will my firm be a priority in the relationship?

Is the provider committed to fair and competitive pricing?

h id h i i i h dl i f Does the provider have requisite FX expertise to handle unique aspects of firm’s needs?

What technology will be available to efficiently transact and monitor FX activity?

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Best Practices for Selecting a FX Provider

• What internal controls does my firm need in place to ensure t ti d t d i d t ?transactions are conducted in a prudent manner?

• What monitoring and reporting tools does my firm require?

• What is the preferred manner to initiate trades?  I.E. Telephone, Online or Integrate with my firm’s accounting or treasury platform.

• What is the desired method of settlement?

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Best Practices for Working with a Providerg

• Have a formal framework in  place to avoid “ad hoc” decision

• Understand what’s considered “material” FX risk to your firm

• Never use a risk management instrument that you don’t understand

• Forwards are the most commonly used derivativeForwards are the most commonly used derivative 

• Avoid attempting to “time the market”  in deciding when to place hedge transactions

• Only place transactions with well capitalized counterparties

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Best Practices in Managing FX Activity

1. Ensure your firm has comprehensive understanding of the exposures related to FX activity

2 Be aware that market liquidity and volatility in respective currencies is an important2. Be aware that market liquidity and volatility in respective currencies is an important determinant of pricing.

3. Fully utilize your provider’s technology to capitalize on control and process efficiencies

4. Select a provider that is a “good fit”  based on unique requirements of  your firm

5 C id i i d FX i i5. Consider opportunities to aggregate and net FX activity

6. When hedging always be mindful to avoid creating too much complexity in the process  

7. Be cautious not to place too much credence in FX forecasts or predictions

8. Remember that the simplest approach to risk management is often the best

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Where Does FX Risk Come From?

• Transactions impacting cash flow including international payable or receivables 

• Inter company funding in which parent provides working capital to a b idisubsidiary

• International payables, receivables and working capital denominated in th iother currencies

• Economics impacts adversely impacting a firm’s competitive advantage  in a local market around the worldin a local market  around the world.

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Hedging

To Hedge Not to HedgeTo Hedge Not to Hedge

Cash flow predictability Procrastination

Budgeted forecast Accounting concernsBudgeted forecast Accounting concerns

Highly risk adverse Long run “immateriality”

Concentrated risk Derivatives are confusingConcentrated risk Derivatives are confusing 

Active treasury Lack of hedging framework 

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Benefits of FX Risk Management

• Budget forecast predictability

• Margin preservation

• Possible higher valuation of firm• Possible higher valuation of firm

• Avoidance of adverse debt covenants

• Cash flow predictability

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Treasury Opportunities 

• Competitive procurement

• Capture process efficiencies

• Take advantage of internal synergies, including natural offsets etc.Take advantage of internal synergies, including natural offsets etc.

• Use the market to your advantage

• Strive for simplicity in managing FX activity

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Background

• Claire’s is one of the world’s leading specialty retailers of fashionable accessories and jewelry at affordable prices for young women, teens, tweens and girls ages 3‐27.  

• The company operates through 2 concepts: Claire’s globally and Icing in NorthThe company operates through 2 concepts: Claire s globally and Icing in North America.

• The company operates over 3,000 stores in North America and over a dozen i i Ecountries in Europe.

• The company also franchises or licenses over 350 stores in Japan, the Middle East, Turkey, Russia, Greece, Guatemala, Malta, Ukraine and South Africa. , y, , , , ,

• International Sourcing

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Locations

• North America • Europe (cont.)

– United States

– Canada

• Austria

• Belgium

• Netherlands

• Europe

– Euro zone

• Ireland

• Portugal

• United Kingdom

• Switzerlande a d

• France

• Spain

• Germany

• Czech Republic

• Poland

• Hungary• Germany

• Switzerland

Hungary

• China

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What We Look for in an id

1. Competitive rates…net of costs, fees, etc.

FX Provider

1. Competitive rates…net of costs, fees, etc.

2. Ease of use• One step processp p• Getting transactional rates• Making and confirming trades• Settlement process

3. Access to research and information

4 Account Manager4. Account Manager

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Q&A

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APPENDIX

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Speakers

• Stephen Kuhl CFA• Stephen Kuhl, CFA

Steve is  the Director of Client Management and Foreign Exchange Trading for American Express FX International Payments. Steve has 20 years of senior management experience in foreign exchange and capital markets including Travelex, First National Bank, TD Ameritrade and Prudential. In addition, he was a founding partner and Chief Investment Officer of Currency Logix, a successful startup focused on g p y g , pmulticurrency investment and risk management applications.

Steve been cited in many industry publications including Wall Street Journal, Bloomberg and Global Finance.. He has served as an adjunct faculty member of Creighton University in the area of international finance.

• Bradley D. Larson, CTP

Brad Larson is Vice President, Global Treasurer, for Claire’s Stores in Chicago, IL. A member of AFP since 1995, he was on the Board of Directors from 2001 to 2010 and served as Vice Chairman Secretary f 2002 2004 B d l i b f h G R l i C i d i hfrom 2002‐2004. Brad currently is a member of the Government Relations Committee and is that committee’s representative to the Payments Advisory Group. He was a Founding Member of the AFP of Canada Board of Directors from 2005‐2008. and was the first Chairman of the AFP Working Capital Management Task Force. Brad is a frequent speaker at financial conferences.  Prior to joining Claire’s, he held positions in Treasury at PetSmart, Payless ShoeSource, and Pamida. p y , y ,

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CPA InformationCPA Information

• CPA Field of Study:CPA Field of Study: 

Finance

C C d• CPE Code: 

FI30

27‐Oct‐11 24

This information should not be reproduced. 

American Express is not providing you with legal tax orAmerican Express is not providing you with legal, tax or financial advice. We recommend that you consult your own advisers to determine whether and how to use the FX International Payments serviceFX International Payments service.

27‐Oct‐11 25

   

 

      

                  

Introduction The global economy has created opportunities for businesses of all sizes. Tapping into a worldwide market can help a business acquire new customers or locate new suppliers. To take advantage of these global opportunities, businesses need to have a reliable international payment solution in place. It is important to select a provider with the expertise to help you navigate what can be a complicated process, so you can focus on your business. This guide provides you with four steps to improve your international payment processing and introduces you to the benefits of using American Express for your foreign payments. A case study and FAQ can further help you gain key insights into the intern ational payments process. The goal is to find a provide r who can meet the specific needs of your business. Follow these four steps to familiarize yourself with making foreign currency payments:

1. Become Familiar with Foreign Currencies If you are considering doing business abroad, you may think it’s easier to use U.S. dollars to pay overseas parties. Yet, paying in foreign currency may have advantages: Paying overseas business partners in a foreign currency may allow you to take advantage of a favorable exchange rate. You may be able to negotiate better prices by saving your international partners the hassles and cost of exchanging U.S. dollars into the local currency. However, transacting payments in foreign currency inevitably exposes your business to some degree of risk. Exch ange rates are in con stant flux, which makes it d ifficult to pre dict and control costs. Consider the euro an d the British po und, two cu rrencies commonly traded wi th the U.S. dollar: In 2010, the euro’s value fluctuated by as much as 16% vs. the US dollar, while the pounds value in USD varied as much as 13%. On larger transactions, the volatility of foreign exchange rates can be very costly for your business if not properly managed.

2. Manage Fluctuating Exchange Rates

Just as large corporations have hedging strategies to protect their bottom lines from unpredictable and potentially costly fluctuations in the currency markets, other businesses can also reduce their vulnerability with a few simple steps:

Lock in today’s exchange rate. If you have an obligation to make a payment in foreign currency, such as an upcoming purchase of inventory, a forward contract allows you to lock in an exchange rate by agreeing to purchase a specific amount of foreign currency at a specific time. This way, you know how much it will cost you in U.S. dollars to purchase the foreign currency that you will need. Forward contracts help you to reduce your exposure to variations in the foreign currency markets.

Batch transactions. Aggregating multiple payments with the same currency can help you to get a better exchange rate than sending payments individually. Batch payments are popular with business owners who work with several suppliers or contractors who receive payments in the same currency.

Weigh providers carefully. Be mindful of transaction fees. The cost and convenience of doing business overseas can vary greatly depending on the service you use.

   

 

      

3. Help Protect Yourself From Transaction Risk

In addition to currency-related risks, the transaction process can be complicated for businesses with limited experience dealing with foreign currencies. Incomplete or inaccurate information can hold up transactions and cost your business time and money.

An experienced international payment provider can answer your questions about what information you will need to provide in order to initiate a payment. This can help you to collect the necessary information and to get your payments submitted on time.

4. Save Time

A service provider who is dedicated to foreign currency payments can help you get the most out of your transactions, while freeing up your time so that you can focus on running your business.

Online platforms have also made it easier to send payments overseas. Users may be able to view transaction details online and to save the payee details for future use.

Using an online platform for financial transactions can come with risks, which is why it is important to choose a payment provider with appropriate security procedures. For example, you may want to look for an international payments provider who allows you to set up a requirement for a second approval level for each transaction (i.e., a requirement that a transaction be approved by two users that you select, before it will be processed). A well-established provider can demonstrate a strong performance record and will have a knowledgeable staff to address concerns.

Case Study

Claire’s Stores, Inc. is the leading specialty retailer of fashion accessories and jewelry with two distinct brands: Claire’s and ICING. For the past 35 years, Claire’s has continued to understand and connect with customers by providing a fun store environment to shop the right product categories and trends that resonate with the brands’ customer segment. Their goal is to be the fashion authority in offering an eclectic mix of accessories and jewelry targeted to the lifestyles of kids, tweens, teens and young women around the world.

The company operates over 3,000 stores in North America and over a dozen countries in Europe. The company also franchises or licenses over 350 stores in Japan, the Middle East, Turkey, Russia, Greece, Guatemala, Malta, Ukraine and South Africa.

   

 

      

Claire’s Stores benefits from the following FX solution key features and benefits:

• Claire’s can send foreign currency payments through the American Express FX International Payments secure online payment platform

• Claire’s benefited from no set up fees and has no minimum obligations.

• Claire’s is assigned an account manager as their direct point of contact should they have questions about how to initiate a payment or current rates. Whatever their FX needs may be, they have an experienced Account Manager available to assist them.

• The FX International Payments secure, convenient online platform was easy to use and worked with Claire’s existing US bank account.

• A registered American Express Card was used to enroll in the Membership Rewards program to receive points on eligible FX transactions. Claire’s earns 1 point for every $30 of eligible FX transactions (subject to a limit of 4,000 points per transaction).1 This cost savings positively impacts the company’s bottom line.

• Claire’s saves payee information, creates a template for frequent payments, sets user authorizations or permissions, and downloads custom reports - all based on their business needs.

   

 

      

Frequently Asked Questions about Foreign Currency Payments

The foreign exchange industry is continually changing. The following FAQs help explain some of the basics of making FX payments:

Q. How do FX forward contracts work?

A. An FX forward contract is an agreement to buy a specific amount of FX at an agreed-to rate at a future time. By entering into a forward contract, you lock in an exchange rate for a pair of currencies (e.g., euro-dollar). Once you have an FX forward contract in place, you can more accurately forecast your costs, since you know how much it will cost you to purchase the foreign currency for that upcoming international payment. There are two types of FX forward contracts:

• Fixed forward contracts lock in a rate to use for a transaction up to one year in the future. These contracts are used when you know the transaction date.

• Window forward contracts, also called open contracts, set a range of dates during which you will purchase the FX. These contracts are helpful when payment dates are uncertain.

Q. What is an incoming foreign exchange wire?

A. An incoming foreign exchange wire is an electronic transfer into your U.S. bank account. Foreign currency that you hold overseas or that another party owes you is converted by American Express into U.S. dollars and deposited in your U.S. bank account.

Q. What information do I need to include with an international payment?

A. You will typically need the name, address and account number of the recipient along with the recipient’s bank name, address and routing information, including its Bank Identifier Code (BAC). For European payments, an International Bank Account Number (IBAN) is required.

Q. How long does it take for a payment to reach a recipient?

A. The time varies according to the type of payment and the service provider. In most cases, an international wire payment will arrive in 24 to 72 hours.

Q. How can I help protect myself and my company from fraud and phishing?

A. Be wary of emails imitating reputable companies that ask you to take urgent action requiring sensitive information to be divulged (e.g., validating or updating account details). Phishing emails are often generic and don’t address you by name. Avoid clicking on links in these emails. Make sure that your anti-virus software is up to date.

1. Membership Rewards: One (1) Membership Rewards bonus point will be awarded for every $30 your business wires internationally using the FX International Payments (“FXIP”) Service. The maximum award per transaction is 4,000 bonus points. Not valid for same currency transactions (e.g., US Dollar to US Dollar). To be eligible to earn Membership Rewards bonus points, your business must first apply for the FXIP service and be approved, and must also complete and submit to us a form designating an American Express Card that is already enrolled in the Membership Rewards program (the "MR Program") to which points will be credited. That American Express Card must be current and enrolled in the MR Program at the time the transaction is initiated, FXIP must have a completed registration on file for the Card, and there must be no unpaid FXIP obligations of your business or other violation of or default under the FXIP Terms and Conditions at the time of bonus fulfillment. No bonus points will be awarded retroactively for transactions processed prior to the enrollment of the business in the FXIP service and the processing of the MR Program registration form. In the event a registered Card is lost, stolen or renewed, you must register the new Card by submitting an updated form to FXIP with the new Card information. Processing of the registration form takes approximately 2-4 weeks. To obtain a registration form call 888-391-7791. Bonus points will be credited to the Card's MR Program account within 10-12 weeks after the eligible transaction is complete. Membership Rewards bonus points that are awarded to the business for its transactions with FXIP are subject to the terms and conditions of the MR Program, including rules regarding forfeiture of Membership Rewards points. See membershiprewards.com/terms for more information. Transactions by university or financial institution clients are not eligible for this offer. Bonus ID 7601.

 

   

 

      

Forex and Energy Prices Changes in fuel prices worldwide of course have an effect on the cost of doing business. But they can also affect exchange rates, which means businesses doing business overseas have to be vigilant. Here’s what to look for. By Charles Slack Because global energy markets are denominated in U.S. dollars, American companies have the luxury of buying and selling oil largely without factoring currency exchange into the equation. Unfortunately, that doesn’t make Americans immune to energy price increases—as the recent sticker shock at U.S. gas pumps makes clear. In fact, while U.S. oil prices and foreign exchange rates would seem to be unrelated, they reflect the same underlying forces, says Craig Pirrong, Director of the Global Energy Management Institute at the University of Houston. “In the past five years we’ve seen a strong correlation between the price of oil quoted in dollars and the value of the dollar relative to other currencies,” Pirrong says. “When the dollar weakens relative to other currencies, it also weakens relative to commodities.” That means higher oil prices. The rapid upswing in global oil prices since September 2010 owes itself in part to U.S. government policies aimed at stimulating the economy out of recession. The Federal Reserves initiative known as QE2 (for the second round of quantitative easing) put more than $600 billion into circulation. The flood of dollars has contributed to an inflation in commodity prices (including oil) as well as helping to weaken the dollar in foreign exchange. Other forces are helping drive up oil prices as well, Pirrong notes. Turmoil in the Middle East, especially oil-rich Libya, has disrupted production. And rising demand from developing countries such as China and India has put enormous pressure on world oil supplies. “There isn’t a lot of slack in the system,” Pirrong says. “That means disruptions or even fears of disruptions can have appreciable price impacts.” Amid a weakened dollar and massive U.S. budget deficits and debts, some nations, particularly those hostile to the United States, have called for energy to be traded in some non-dollar denomination. “What that would mean is fewer people holding dollars,” Pirrong says, resulting in a much higher escalation in prices for commodities. While not impossible, Pirrong believes such a shift is unlikely in the near future. Just as the dollar remains the world’s dominant reserve currency, it is likely to hold on as the denomination for oil. “The dollar’s not doing so great right now, but who would you nominate in its place? There’s more speculation about whether the euro will be around in five years than whether the dollar will still be the reserve currency.” Still, for the foreseeable future, Americans should expect little relief from steadily rising fuel prices, he adds. For business managers, that means dealing with higher shipping costs—a particularly important consideration for companies reliant on moving large quantities of low-value goods. In the coming years, more and more companies may seek relief by sourcing products from suppliers closer to home, or even building plants nearer to customers, Pirrong says.

   

 

      

That doesn’t mean energy prices will rise forever. Prices dipped sharply after the global economic collapse of 2008 and the onset of the Great Recession. But even those angered by the cost of filling the tank of their car or shipping a load of merchandise cross-country probably wouldn’t wish for lower energy prices if the cost was another recession, Pirrong notes. “The world economic situation is so unsettled right now that one could envision another serious setback that would cause oil prices to decline. But if we see more normal growth, we are in for a protracted period of higher energy prices.” Charles Slack is the author of several books and numerous business and financial articles. His business books include The Communicators: Leadership in the Age of Crisis (co-author, 2010) and Hetty: The Genius and Madness of America’s First Female Tycoon. 

   

 

      

Preparing Your Business for the Future The world is changing, and the businesses who meet these changes head-on, with foresight, are the ones that will survive, and even thrive. By Charles Slack Recession and recovery; technology that seems to reinvent itself (and rewrite the rules for business) overnight; a developing world rapidly steering global growth away from traditional powers, towards uncharted waters. If you feel the pace of global change accelerating these days, you’re not alone. In fact, it can all seem a bit overwhelming. Yet while disruptions are by nature unsettling, they also present tremendous opportunities for companies able to adapt, grow, and even drive change through innovation, says James Canton, founder of the Institute for Global Futures. Here are some of the major factors managers should prepare for in the decade to come. The global middle class. As workers in China, India and elsewhere demand higher wages and greater access to material goods, the global middle class will grow exponentially, says Canton, author of The Extreme Future: The Top Trends That Will Reshape the World in the 21st Century. At the same time, the Internet and the spread of social media have democratized marketing to the point that companies of any size can reach around the world. Implications: While this trend is already putting a strain on global resources, from food to energy, it will also create major opportunities for companies able to penetrate these markets. Companies should actively develop strategies for tapping these vast and growing markets, Canton says. Sustainability. More than just a passing fad, “sustainability in business practices is becoming a standard expectation, not an exception,” says Glen Hiemstra, founder of Futurist.com and author of Turning the Future into Revenue: What Businesses and Individuals Need to Know to Shape Their Future. Young people today are closely bound by their concern for the environment, regardless of what country they live in, he says. “As the generations change, and as energy and climate issues continue to accumulate, businesses that are sustainable will generate greater brand loyalty. Moreover, they will save money.” Implications: Look for ways to incorporate environmentally sustainable practices into all of your business practices, not just a program on the side, Hiemstra says. High velocity technology. According to Canton, the future of business is “the Internet: every place, everywhere, always on, and always aware,” Canton says. A Web site can no longer suffice simply to drive customers to your bricks and mortar business or service. As mobile technology develops over the next several years, customers will demand access to your services wherever they are, and whenever they need it. That means paying bills, learning about your products, or getting backup instructions, from their mobile devices. Implications: Developments such as cloud computing put powerful technology in the hands of companies of any size, Canton says. Winners in the race for market share will be those who use technology to reach their customers through fully mobile platforms. The war for talent. Don’t be fooled by recent high unemployment rates. Companies over the next decade will have to fight for the smartest workers capable of keeping them competitive, especially when it comes to technology. Canton says, “You need the right people, but companies cannot find them.”

   

 

      

Implications: Hire the most promising young workers right out of college or grad school and start training them in your systems right now. The near-term costs will pay off with talented, dedicated staff, Canton believes. If you decide to hire from the current workforce, look to poach talent from companies you most admire. The pay gap. In the early 20th century Henry Ford paid his workers a then-generous $5 per day, in part because he needed a solid middle class able to purchase his cars. Even as the global middle class expands, in the United States, middle class wages in the U.S. have stagnated, Hiemstra says. Real economic growth can’t happen “until we remember that people have to make decent money in order to spend money,” Hiemstra says. Implications: Forward-thinking companies, to help ensure their own future prosperity, will look for ways to bolster employee compensation and close the income gap, Hiemstra suggests. Perhaps the most jarring assessment by futurists such as Canton and Hiemstra is that the pace of change, as breathtaking as it seems right now, will only intensify in the years to come. Since this vehicle has no apparent brakes, the best place to be, they say, is in or near the driver's seat—helping to steer rather than simply going along for the ride. Charles Slack is the author of several books and numerous business and financial articles. His business books include The Communicators: Leadership in the Age of Crisis (co-author, 2010) and Hetty: The Genius and Madness of America’s First Female Tycoon. 

   

 

      

The Dollar and Your Business Steps businesses can take when the dollar is down By Kathleen Kearns The U.S. dollar is not worth as much as it once was compared with other currencies. “High unemployment, weak housing, and low growth all contribute to keeping the dollar weak,” says Rhonda Abrams, a small business columnist for USA Today and the author of numerous books on entrepreneurship. Some gain, some lose. A weaker dollar helps some businesses and harms others—and has minimal effect on a lucky few. Small businesses that use few raw materials or that buy them locally and serve a local clientele—an architect or a corner restaurant, for instance—may barely notice the dollar is down. Others see business improve when the greenback slumps. “Those who export or sell their products or services internationally benefit because it costs less to buy American goods,” Abrams says. “Also, those in tourism-related businesses often benefit because its cheaper to come to the U.S.” The businesses that cater to or supply exporters and tourism benefit, too. On the other hand, companies that buy products or services overseas take a hit when the dollar is down because those goods or services cost more. “A weak dollar hurts small retailers who buy foreign-made inventory (which is most everyone), small manufacturers who buy foreign parts and material, and small companies that outsource services,” Abrams says. “It also hurts every small business that depends on transportation—shipping their goods, traveling to make sales, etc.—because foreign gas is more costly with dollars.” How to protect your company. Abrams encourages companies to think globally to minimize the effects of a weak dollar. “Look to global opportunities to sell, to distribute, to find partners, even to seek investors,” she advises. “With a weak dollar, our goods and services become more competitive. Definitely think about selling your professional services, too, because the world still values American know-how.” Other strategies when the dollar is down? Abrams suggests that business owners seek out American suppliers, whose prices may compare favorably to those of foreign companies. And companies should compete aggressively for American customers, who may find U.S.-made products cheaper than those from abroad. “Broaden your horizons,” she adds. “Travel. Check out other global markets and opportunities.” Some companies may find it beneficial to exhibit at foreign trade shows, where potential clients from other countries may find their goods or services are a bargain.

   

 

      

Reaching new markets abroad entails some risk and expense, but there are low-cost ways to test the waters. For instance, manufacturers and service providers can use the internet to market their products and establish relationships in other countries. Some may be able to acquire far-flung customers through online means alone. Smart business owners recognize that a weaker dollar opens opportunities for cost savings and new directions. American companies that once outsourced part of their operations—a call center, for instance—may find it makes sense to bring those jobs back to the U.S. A weak dollar encourages foreign investors to set up shop in the U.S., and that means potential new customers for the businesses that supply them. And with interest rates down, small businesses have cheaper access to capital. That can allow you to change focus and take advantage of the dollar’s new position in the international marketplace. Kathleen Kearns’s work has appeared in a wide range of online and print publications in the U.S. and abroad. Recently, she served as editorial consultant for Regaining the Dream: How to Renew the Promise of Homeownership for America’s Working Families, forthcoming from Brookings Institution Press. 

   

 

      

Is the Dollar Still the World’s Currency? Why the greenback has weakened—and why it matters By Kathleen Kearns After trending downward for almost a decade, the foreign exchange rate for the U.S. dollar recently reached a 40-year low. The buck’s buying power has weakened against prominent currencies like the euro, the yen, and the pound, as well as the currencies of emerging economies like India and Brazil. It’s a big change from the days when the dollar was the dominant international currency—a half-century run that began right after World War II. In the immediate post-war period, the U.S. accounted for half of global production, points out Barry Eichengreen, author of Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System. He is a professor of economics and political science at the University of California, Berkeley. “Europe was in tatters, the Japanese economy had not begun to grow, many emerging markets were still colonies, and others were cut off from the West,” says Eichengreen. The situation now is quite different: the U.S., for example, accounts for just 20 percent of world production. The reasons for the dollar’s decline. The rest of the world’s increasing production of goods and services certainly contributed to the decline in the dollar’s relative value. But Federal Reserve policies have also played a role, says Eichengreen. The Fed attempted to soften a series of blows to the U.S. economy—the end of the tech bubble, the economic impact of 9/11, and the recent recession—by keeping interest rates low and by putting more dollars into circulation. “U.S. interest rates are lower than the interest rates in a variety of other countries,” he says. “Investors have been shifting money from where interest rates are low to where they are higher, and that has weighed on the dollar.” The dollar and international competitiveness. A relatively weak dollar is not entirely a bad thing. When it’s less expensive for foreign businesses and individuals to buy U.S. goods and services, American exports increase and more foreign tourists come to visit. More money flows into the U.S., the trade deficit decreases, and Americans themselves tend to buy more American products. All these events are good for the national economy. On the other hand, a weak dollar makes the cost of imported goods, doing business offshore, and travel abroad more expensive for U.S. residents. Some countries sell oil and gas for euros, and when the dollar is down relative to the euro that pushes the cost of transportation and energy up for Americans. And when the dollar is less attractive to foreign investors, American banks have to offer higher interest rates to lure the offshore investment that the U.S. needs to grow its economy.

   

 

      

The possibility of a stronger dollar. For the dollar’s relative value to increase, three things would have to occur, according to Eichengreen. “Number one, our economy would have to begin to grow again. Number two, the Fed must remain committed to policies of price stability,” he says, referring to the Federal Reserve’s anti-inflation moves over the last decade and beyond. “And number three, we’d have to get our financial health back.” And what if the dollar doesn’t regain its former position as the single dominant international currency? Two outcomes are possible, says Eichengreen: The dollar’s relative buying power could continue to decline. Or, with an improved U.S. economy, the dollar could become one of several global currencies, alongside perhaps the euro and the Chinese renminbi. After all, says Eichengreen, multiple currencies have had strong international roles concurrently in the past. Either way, Americans will need to adapt to the dollar’s new position among world currencies. Kathleen Kearns’ work has appeared in a wide range of online and print publications in the U.S. and abroad. Recently, she served as editorial consultant for Regaining the Dream: How to Renew the Promise of Homeownership for America’s Working Families, forthcoming from Brookings Institution Press. 

   

 

      

If Euro Volatility Hits Your Business Steps businesses can take to counter swings in exchange rates. By Jill Hamburg Coplan Will the center hold in Europe? Germany, France, and the continent’s other wealthy, exporting nations may succeed in keeping the euro zone glued together. They’ve made loans to the troubled debtor nations on Europe’s periphery (recently, Greece and Ireland) and promised more. But signs of financial trouble persist in Spain and Italy. In late January, China stepped up to purchase European debt, buying the euro time, but the uncertainty isn’t over yet. “The situation in the euro zone will continue to unravel,” at least through June, predicts Derek Frey, a market strategist with forextradersdaily.com. High prices for commodities, such as wheat from Russia as well as gold and oil, could also produce strains. So could the stop-and-go U.S. economic recovery, and overheating in emerging economies. All that volatility is good for currency speculators—market timers and other gamblers who try to profit from the market rollercoaster. Not so for companies that need stability to do business. Erratic swings introduce unwanted dangers, especially if, as Frey puts it, treasurers “try to ‘game it’ and guess where they think exchange rates are going.” Up- and Downsides of Financial Risk Foreign exchange volatility is a type of what’s called ‘financial risk’—a set of uncertainties that may lead to big losses (other financial risks are changes in borrowing rates and commodity price swings). There may be an upside when exchange rates shift. If the dollar strengthens against the euro and you’re a U.S. clothing maker, say, it’s cheaper to pay your Parisian designers or your Milanese textile mills. But there’s a downside. If Marks & Spencer department stores around the eurozone carry your dresses, those customers’ buying power is weak. Your dresses’ prices are less competitive. European sales may well fall. If, instead, the dollar declines against the euro, your problems aren’t over—they’re only different. Now your euro-denominated salaries, manufacturing costs, raw materials, and payments to vendors all rise. On the positive side, you may become a lower-cost producer, able to undercut your European competitors’ prices. That’s the big picture, over the longer-term. Companies also confront shorter-term forex risks. A common one is transaction exposure, namely what happens when exchange rates shift during a small time frame. Say you place a foreign order March 1, and sign a contract that day at one exchange rate. Imagine currency Q is worth one dollar and your curtain company contracts to buy silk for Q 90,000, which at signing is equal to $90,000. But when payment comes due June 1, imagine the dollar has fallen relative to the Q. Now the exchange rate is .9Q to $1. Suddenly you’re obliged to pay $100,000. That’s quite a difference. Protecting Your Company Currency hedging is a way to minimize your company’s forex risk. Sometimes it’s done with financial instruments, for which there is a fee, though a company will, when possible, factor that cost into the price of its goods or services.

   

 

      

There are several types of hedges:

• “Natural” hedging is when companies choose the location where they borrow funds, or source raw materials, to minimize forex risk. They can try to have income in the same currency, and at about the same amount, as they have expenses. (This is sometimes called an operational hedge.)

• Hedging can also be included in the design of a company’s contracts. For example, your

company can agree to bear the risk of a certain dollar-euro trading range, but the customer agrees to pay if the moves are larger, in either direction—absorbing the cost or reaping the windfall gain.

• Perhaps the most popular hedging instrument for smaller companies is the forward contract,

which locks in a foreign exchange rate. You give up the potential upside (no bargains on Milanese wool) but are protected if the exchange rate moves out of your favor. When moving into forwards, treasurers ask a few important questions, including: How much should be hedged? And for how long? Forwards with variable dates of delivery are a flexible solution for many companies.

Accounting for Hedges at Tax Time To be sure, hedging may add an additional layer to corporate accounting come tax time, explains Raymond Montero, CPA in Los Angeles and a managing director at True Partners Consulting who has practiced international accounting in the U.S. and Mexico. While many business losses may be deducted, that’s not automatically the case for foreign-currency exchange losses. They must be ‘realized’ first, or experienced, not just be losses on paper, explains Montero. Hedging can sometimes be simplified. Accounting for every single hedging by transaction would be “quite a burden for a small business,” says Montero. But if your company maintains what’s called a Qualified Business Unit (QBU) overseas—a separate, clearly identified unit with its own separate books and records—you can avoid that burden. That’s only one of many forex hedging shortcuts. The rules are complex and require an accountant to see what makes sense for your company. Jill Hamburg Coplan, an adjunct professor at New York University’s Arthur Carter Journalism Institute, has written about markets, finance, business and economics for Bloomberg News, BusinessWeek, Newsday, and Barron’s, and served as an economics editor for think tanks and the United Nations. 

   

 

      

Over-the-Counter Foreign Exchange (FX): An Introduction The basics of understanding how currency trade works. By Jill Hamburg Coplan While more currency—or foreign exchange, forex, FX—changes hands daily than any other financial asset (about $4 trillion on average worldwide), it doesn’t happen on a specific market or through a clearinghouse. Instead, there’s a decentralized “over-the-counter” forex market where buyers find sellers and vice versa. Individuals and small- to medium-size firms turn to brokers to represent them. (Giant multinational banks that need very large “lots” of foreign currency have their own buyer-seller matching system.) Transactions can theoretically happen anytime, any day, since currency trades around the clock, thanks to the major dealers, banks, and brokers concentrated in London, New York and Tokyo, who open shop as their counterparts in other time zones are shutting down. “Fundamentals”—real events in politics and economics (shifts in a nation’s interest rate, trade balance, or inflation, for example) make currencies fluctuate relative to each other. A natural disaster can also hurt a currency as holders sell, fearing the worst. When business owners, treasurers, or CFOs want to lock in stability and eliminate currency fluctuation to keep expenses predictable, they’re looking for more than just a purchase: They want to hedge risk. They have recourse to two main instruments: spot transactions, which allow them to purchase forex for delivery within a matter of days, and forward contracts, which involve purchase of forex at a particular time in the future, which may be a number of months away. These deals aren’t standardized, but custom tailored, as needed. Forex is highly liquid, which means any size transaction is always available. Liquidity, plus high-tech telecommunications, keep pricing efficient as data blinks around the globe almost instantaneously. So even absent a centralized market, brokers’ or dealers’ quoted prices (called “bid/ask” rather than “buy/sell”) are competitively close, often with razor-thin differences between bid and ask. Confusion sometimes arises because this over-the-counter currency market—yen, euros, dollars, or yuan—is distinct from the market in currency-related futures and options. Futures and options are financial instruments based on currencies. These trade in standard lots, on major exchanges, like the Chicago Mercantile Exchange or the NYMEX in New York. While professional traders track the news and financial press for every word about the euro or dollar, most people just feel the upshot: changing prices and profit margins. Currencies are fluctuating widely today, with growing cross-border trade, economic distress, and split-second pricing. It’s striking that forward contracts, a solution created centuries ago so farmers could get paid, are as important to businesses as ever. Jill Hamburg Coplan, an adjunct professor at New York University’s Arthur Carter Journalism Institute, has written about markets, finance, business and economics for Bloomberg News, BusinessWeek, Newsday, and Barron’s, and served as an economics editor for think tanks and the United Nations. 

   

 

      

Building Relationships with Overseas Partners What you need to know to get off to a good start when doing business internationally. By Charles Slack In a perfect world, every transaction with a vendor or customer would run like clockwork. But now that your business world can extend from Tijuana to Thailand, it’s more important than ever to guard against unforeseen problems—whether a dispute over a parts shipment or a question of setting prices while dealing with foreign currency exchange. Another World Overseas, especially in the developing nations that are currently driving world growth, contract laws can be vague and extremely difficult to enforce, says Jonathan Fink, managing director of TSI Global Consulting, a San Antonio, Texas company that helps Americans do business overseas. That’s why business success often hinges on building trusting relationships—something United States managers, accustomed to speed and formality in their dealings, may feel uncomfortable with. “I’ve seen Fortune 500 managers walk into a boardroom overseas and expect to strike a huge deal,” Fink says. “That’s just not going to happen. Business is done differently overseas. It really is a function of social capital and getting to know one another personally.” If a dispute arises, a lawsuit filed in a developing nation can be extremely expensive, “and you’ll probably lose,” Fink notes. But if you’ve built close ties based on mutual respect and need, you’ll most likely be able to work out a compromise to resolve any dispute—for example, adjusting the bill on the next order to compensate for a past mistake. Factoring in Currency Shifts U.S. managers too often set rigid prices that don’t reflect constant changes in currency values. As currencies shift, your products or services, priced in dollars, could suddenly become prohibitively expensive for a foreign customer. Instead of a flat price, establish a range that you feel comfortable with, and price according to changing currency conditions. The Limits of Trust Of course, even with your best efforts to build trust, issues can arise. Especially in the early stages of a relationship, an overseas supplier, for example, may require proof of payment before sending a shipment out the door. A phone call assuring that the check is in the mail often won’t suffice. Be sure to keep all copies of the transaction and any currency orders relating to the transaction in order to prove that a payment has been made. As with any new venture, taking your business overseas can seem daunting. Careful planning and a human approach to relationships offer the best chances for success, Fink notes. At the outset, your motive may be to stay competitive in a global market. Yet as you invest the proper time in learning cultures and cementing friendships, you may well find the world has become a much richer place, personally as well as financially. Charlie Slack is the author of several books and numerous business and financial articles. His book, Hetty: The Genius and Madness of America’s First Female Tycoon, is in development for film by Edward Pressman, producer of Hoffa, Wall Street, Reversal of Fortune and other movies. 

   

 

      

The U.S. Budget Deficit and Foreign Exchange How the hefty U.S. government budget deficit has an impact on foreign exchange rates and your business. By Charles Slack As the U.S. budget deficit and spiraling debt capture the attention of politicians, the media, and the public alike, much of the focus has been on domestic issues such as government spending, public pensions, and taxes. Less publicized, but equally important, is the impact these forces can have when the value of the dollar falls, driving up costs for U.S. businesses and organizations that must exchange currency to buy goods or hire workers overseas. Even more ominous than the current budget deficit of about $1.3 trillion is the large and growing U.S. debt—money that the government has borrowed by issuing U.S. Treasuries, and which it will have to repay. Since 2002, the national debt has more than doubled, from $6 trillion to more than $14 trillion—or, nearly the same size as the entire U.S. GDP. In 2010, the financial ratings agency Moody’s Investors Service warned that U.S. Treasury bonds, traditionally considered one of the safest investments in the world, could be downgraded if the U.S. government fails to correct its debt problems. Earlier this year, New York University economist Nouriel Roubini echoed those sentiments, warning of a fiscal “train wreck” unless the United States effectively manages its deficit and debt. “Everybody focuses on the deficit. But the real impact is from the debt,” says Kimberly Amadeo, an Arizona-based consultant and head of WorldMoneyWatch.com, which advises companies on how global economic trends impact their businesses. Reserve status in question? Since the end of World War II, the dollar has been the world’s unrivalled reserve currency—the currency that other countries purchase in order to diversify and stabilize their own economies. That status gives the dollar inherent strength through good times and bad—an important consideration for U.S. organizations that routinely exchange dollars into other currencies. While countries globally still hold more than 60 percent of their foreign reserves in dollars, countries such as China are increasingly expressing alarm at the growing size of the U.S. debt. “When the debt is the same size as our GDP, they start to wonder about our ability to pay it all back,” Amadeo says. If those doubts grow, countries could scale back Treasury purchases. China, France, and other countries have even raised the possibility of elevating the Chinese yuan or a new currency to replace the dollar as the world’s reserve. “So far, it’s mainly saber-rattling,” Amadeo says. For years, China has kept the yuan deliberately low to boost its own export-driven economy. And despite the great economic strides China has taken in recent years, great logistical hurdles remain before the yuan could become a global reserve currency. Still, the mere fact that world leaders are discussing such a shift reflects a more tenuous position for the dollar. Indeed, since 2002, the dollar has declined more than 50 percent to the euro, Amadeo says. Further declines are possible as the country grapples with ways of reducing the debt and the deficit. Politicians and the public alike will have to address the need for serious reforms in areas such as Social Security, Medicare, and defense, Amadeo says.

   

 

      

Meanwhile, individual business or organization managers are starting to consider taking certain steps to prepare themselves in case the dollar declines. For those that are preparing, Amadeo suggests: Lock in good rates. Airlines and other businesses buy contracts for future fuel purchases in order to protect themselves from price volatility. In the same way, if foreign exchange is a regular part of your business, consider locking in exchange rates that you consider attractive, in advance. Of course, there are risks. Over the short term, volatility in the markets could cause the dollar to increase, meaning you could miss out on a favorable exchange rate. Over time, though, if the dollar steadily declines, locking in rates could add protection. And, knowing your costs in advance can help you plan ahead, Amadeo says. Due to the complexities of foreign exchange, she adds, it’s always best to get guidance and help when engaging in foreign exchange. Ramp up your exports. A weak dollar may make it costlier to buy things or pay employees overseas, but it provides a competitive advantage when selling. Look for ways to export your goods and expertise in order to offset the rising costs of the things you must import. Source locally. For years, inexpensive labor in the Far East has encouraged U.S. businesses to hire out production and services to other countries. While outsourcing may still be a bargain, the prospect of rising wages in developing countries, and the possibility of a falling dollar, make this a good time to think about developing local sources for some of the things you need. Charles Slack is the author of several books and numerous business and financial articles. His book, Hetty: The Genius and Madness of America’s First Female Tycoon, is in development for film by Edward Pressman, producer of Hoffa, Wall Street, Reversal of Fortune and other movies.