managing foreign currency risk - cips and events/member...managing foreign currency risk richard...

The Volatile World of Exchange RatesManaging Foreign Currency Risk

The Volatile World of Exchange RatesManaging Foreign Currency Risk

Richard Masser FCIPSRichard Masser FCIPS

CIPS JourneyCIPS Journey

2009 CIPS Council

2010 FCIPS

2011 CIPS Board of Management

2012 CIPS Awarding Body and Foundation Boards of Trustees

2013 CIPS Global Board of Trustees Chairman

2015 CIPS President

2016 CIPS Appointments Committee

Merchants

Retail

Automotive

Manufacturing

Trading to Distribution

Total Supply Chain Solution

Career JourneyCareer Journey

WolseleyGroup

Ladbrokes

Autogem

Eurospace

Quantum

CrestwoodGroup

CrestwoodGPS

Environmental Factors Generate Risk In BusinessEnvironmental Factors Generate Risk In Business

Political

Economic

Social

Legal

TechnologicalTechnological

EnvironmentalEnvironmental

Political

Economic

Social

Legal

Technological

Environmental

Political

Social

Legal

TechnologicalTechnological

EnvironmentalEnvironmental

Political

Social

Legal

Technological

Environmental Economic

Foreign Currency RiskForeign Currency Risk

What does it mean?

How does it impact upon business?

Results when goods/services are

sold/bought in a foreign currency so creating a

foreign currency inflow/outflow respectively.

Results when companies convert

foreign subsidiary assets and liabilities from

foreign currency to domestic currency.


Transaction Risk

Translation Risk

What Do We Broadly Know About Foreign Currency Risk?What Do We Broadly Know About Foreign Currency Risk?

Nothing new

Exacerbated by global

events

Multiple drivers

Hard to predict without market

intelligence

More on the radar than

ever

Stakeholders more aware

What We Need To Consider in ProcurementWhat We Need To Consider in Procurement

How well do we know our suppliers and

their organisational

(fiscal) structure?

With which other countries do they trade

(buying or selling)?

Are they part of a group and

if so where is HQ and where

are the subsidiaries?

What is their domestic currency?

How are their company accounts

structured?

Are there any identifiable

currency trends?

In House ConsiderationsIn House Considerations

What currencies do we buy and sell in?

How have those currencies behaved over time?

Are there any obvious seasonal or recurring event trends?

Simple two way currency trade or are there cross currency transactions to consider?

Do we regularly monitor key currency behaviours over time?

Key In House Relationships for Procurement to BuildKey In House Relationships for Procurement to Build

Finance

Commercial

Sales

Cross Functional Interface Will Deliver Best Results Every Time

Mitigating StrategiesMitigating Strategies

Paradise Strategy

Buy in Sterling but remember you’re still exposed

Sunshine Strategy

Pass the cost down the supply chain

Equality of Misery

StrategyShare the pain with key stakeholders

Brick Wall Strategy

Other stakeholders realise the problem but refuse to help

Hedging Strategy

Work together with stakeholders to create an equilibrium

AssumptionsAssumptions

Product delivered from China on 70 days 'end to end' lead time

Consignment stock period of maximum 30 days

Customer payment terms of 90 days

Debtor (customer) gap 30 + 35 + 5 + 30 + 90 = 190 days

Creditor (supplier) gap 60 days

Net credit gap = 130 days

Strategy – Leave it to Chance (UK Based Company)Strategy – Leave it to Chance (UK Based Company)

Scenario 1 Flows Sterling Conversion

Euro Cost Base

Base Exchange Rate

Base day set up (plan) Sales Revenue 1,000,000.00 Product Cost of Sale 750,000.00 €975,000.00 1.30Gross Margin Cash 250,000.00

Gross Margin % 25.0%


Euro Cost Base

Actual Exchange Rate

Payment to supplier due Sales Revenue 1,000,000.00 Product Cost of Sale 780,000.00 €975,000.00 1.25Gross Margin Cash 220,000.00

Gross Margin % 22.0%Delta Margin Cash -30,000.00

Strategy – Buy Forward (Fixed) (UK Based Company)Strategy – Buy Forward (Fixed) (UK Based Company)


Euro Cost Base

Base Exchange Rate




Euro Cost Base




Delta Margin Cash -2,895.75 -0.3%Cost of buying certainty

Currency bought forward at secured forward rate of 1.295

Strategy – Buy Forward (OPTION) (UK Based Company)Strategy – Buy Forward (OPTION) (UK Based Company)


Euro Cost Base

Base Exchange Rate




Euro Cost Base




Delta Margin Cash -8,754.86 -0.9%Cost of buying certainty

Currency bought forward at secured forward rate of 1.285

Exercise Option and Save – Outcome A



Euro Cost Base

Base Exchange Rate




Euro Cost Base


Payment to supplier due Sales Revenue 1,000,000.00 Product Cost of Sale 780,000.00 €975,000.00 1.25Gross Margin Cash 220,000

Gross Margin % 22.0%Delta Margin Cash -30,000 -3%

Actual exchange rate on day supplier invoice to be paid

Don’t Exercise Option – Outcome B



Euro Cost Base

Base Exchange Rate




Euro Cost Base


Payment to supplier due Sales Revenue 1,000,000.00 Product Cost of Sale 750,000.00 €975,000.00 1.30Gross Margin Cash 250,000

Gross Margin % 25.0%Delta Margin Cash - 0.0%

Actual exchange rate on day supplier invoice to be paid

Strategy – Trade in Common Currency (UK Based Company)Strategy – Trade in Common Currency (UK Based Company)


Euro Revenue Stream

Base Exchange Rate

Base day Sales Revenue 1,000,000.00 €1,300,000.00 Product Cost of Sale 750,000.00 €975,000.00 1.30Gross Margin Cash 250,000.00 €325,000.00 Gross Margin % 25.0% 25.0%


Euro Revenue Stream


Payment to supplier due Sales Revenue 1,000,000.00 €1,300,000.00Product Cost of Sale 780,000.00 €975,000.00 1.25Gross Margin Cash 220,000.00 325,000.00Gross Margin % 22.0% 25.0%Delta Margin Cash -30,000


Euro Revenue Stream


Payment from customer due

Sales Revenue 1,040,000.00 €1,300,000.00 1.25Product Cost of Sale 780,000.00 €975,000.00 Gross Margin Cash 260,000.00 325,000.00Gross Margin % 25.0% 25.0%Delta Margin Cash 10,000

SCENARIO 1 - LEAVE TO CHANCE - POSITIVE OUTCOME



Euro Revenue Stream

Base Exchange Rate



Euro Revenue Stream


Payment to supplier due Sales Revenue 1,000,000.00 €1,300,000.00Product Cost of Sale 780,000.00 €975,000.00 1.25Gross Margin Cash 220,000.00 325,000.00Gross Margin % 22.0% 25.0%Delta Margin Cash -30,000


Euro Revenue Stream



Sales Revenue 984,848.48 €1,300,000.00 1.32Product Cost of Sale 780,000.00 €975,000.00 Gross Margin Cash 204,848.48 325,000.00Gross Margin % 20.8% 25.0%Delta Margin Cash -45,151.52

SCENARIO 2 - LEAVE TO CHANCE - NEGATIVE OUTCOME



Euro Revenue Stream

Base Exchange Rate



Euro Revenue Stream


Payment to supplier due

Sales Revenue 1,000,000.00 €1,300,000.00Product Cost of Sale 750,000.00 €975,000.00 1.30Gross Margin Cash 250,000.00 325,000.00Gross Margin % 25.0% 25.0%Delta Margin Cash 0


Euro Revenue Stream



Sales Revenue 1,000,000.00 €1,300,000.00 1.30Product Cost of Sale 750,000.00 €975,000.00 Gross Margin Cash 250,000.00 325,000.00Gross Margin % 25.0% 25.0%Delta Margin Cash -

SCENARIO 3 - HEDGE COST AND REVENUE FLOWS - NEUTRAL OUTCOME

Currency soldforward at secured

rate of 1.30

Currency boughtforward at secured

rate of 1.30

AKA

Cur

renc

y SW

AP

It's Only Mind Blowing If You Don't Plan Your Strategy!

managing foreign currency risk - cips and events/member...managing foreign currency risk richard...

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