Managing Foreign Exchange Risk Financial Planning for Exporters

January 25, 2012 | Going Global: Partnering for International Growth

Wes Seeger

(980) 386-1899

wes.seeger@baml.com

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Confidential

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Why are we here?

International Outlook

Overall, 68% of U.S. companies surveyed have some form of foreign market involvement (85% of manufacturers and 51% of services and

commodities companies). As a whole, 56% buy from foreign markets, 49% sell to foreign markets and 31% have operations in foreign countries.

*Source: U.S. Department of Commerce, BEA

“Going Global” has traction

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1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

USD billions US Corportate Profits

Corporate Prof its Receipts f rom Rest of World Ratio

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Foreign Currency Markets

Arguably, global currency markets are the world‟s largest financial market.

2010 average daily global turnover in all FX transactions (spot, forwards, swaps and options) estimated at $4.0 trillion.

Up 20% compared to 2007 (18% at constant exchange rates).

Daily turnover roughly equivalent to annual world trade in goods and services.

US market data shows a collapse in volumes in early 2009, followed by a recovery to late 2008 levels.

The vast majority of transactions take place in OTC market.

Market participants include multinational corporations, investors, financial institutions and central banks; their heterogeneous views and objectives contribute to currency volatility.

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USD bn Average US Daily Turnover

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1989 1992 1995 1998 2001 2004 2007 2010

USD, bn Average Global Daily Turnover

Source: BIS, 2010 Source: FX Committee, Volume Surveys, October 2004 – October 2010.

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FX Market Volatility

Increased business, higher volumes, and more participants leads to currency volatility.

EUR/USD – 2 Year Historical USD/JPY – 2 Year Historical

1.15

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Global Trends and Best Practices

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Globalisation

– Treasury operating models are changing from local to regional to global, with a spotlight on increasing

control. Rationalization and consolidation of providers is a key focus.

Global banking technology

– Increased automation, outsourcing and centralisation of cash and liquidity management. Increased

efficiency and doing more with less.

Risk management

– Cash is King – the lifeblood of our clients‟ organisations. Who has access to what?

Market forces – „credit crunch‟

– Increased need to gain control over internal liquidity, decrease dependency on external funding and

manage risk.

Trends impacting global companies

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Transacting outside of the USD

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Why pay in the functional currency rather than in USD?

Lower Costs, Buying Cheaper

International suppliers often increase their prices in USD to protect themselves from currency rate movement between billing and payment date

Since the supplier is taking the currency risk from invoice date to payment date, the supplier often “charges” the buyer for the ability to pay in

USD versus the local currency

Simply paying in the functional currency improves price transparency and ensures that a wholesale exchange rate is being applied to all

transactions

Achieve Better Accounting

Paying in the functional currency would allow a company to know the exact amount of the foreign currency paid to supplier

Guarantee Promptness

The functional currency of the supplier will typically post to an account faster as the foreign bank does not have to stop the USD payment for

conversion to the local currency

Control / Transparency

Sending the functional currency eliminates over/underfunding an invoice

Maintain certainty over the exchange rate being applied to funds and the amount of foreign currency being received by the beneficiary

Retain the ability to manage the Company‟s exposure to fluctuations in the exchange rate and make the decision to hedge

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Why price products in the functional currency of the buyer rather

than USD?

Increases Competitiveness of Pricing and Product

Pricing in the functional currency allows the product to compete with similar products that are also priced in the functional currency

In times of USD strength, pricing in the functional currency is more attractive to the buyer

Increases Potential Buyers

Products priced in the functional currency are more attractive to buyers unwilling or unable to take currency risk

Increase Price / Margin

Ability to increase price or margin on products priced in the functional currency because the buyer is not taking the currency risk

Since the buyer is unable or willing to take the currency risk, they are often willing to pay more to avoid currency exposure

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Managing foreign currency exposure

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How do I hedge a foreign currency payable or receivable?

Hedging allows a company to lock in a pre-determined rate for a future cash flow:

The most widely used hedging tool is a forward contract

A forward contract is a legally binding agreement to buy one currency and sell another, for settlement (value) on a specific date beyond spot, at

a rate agreed upon today

No initial currency exchange, or payment of premium/fee, to initiate a forward contract

Effectively exchange uncertainty for a known certain outcome

Best suited when there is a desire to lock in current rate, perhaps because of known foreign currency remarket view or because risk

management goal is to eliminate all surprises

Protect against “losses” if the currency moves against the underlying exposure

However, forwards forego any benefit, if currency moves in favor of the underlying

Forward contracts do require credit approval

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When is a foreign currency account appropriate?

Ideal solution:

Buying and Selling product in the same currency

Maintains offices/employees overseas

International subsidiaries

Foreign currency accounts provide robust treasury capabilities such as low value wire payment, cross border ACH,

information reporting.

Use of a foreign currency account, a company effectively protects itself from currency volatility for any amounts where

the volumes of the receivables match the company‟s anticipated payable needs.

.

Key Considerations:

Opening a foreign currency account abroad- Transaction volumes, payments, receipts, payroll.

Increase control over bank accounts, automation, minimize idle cash balances.

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Documents required to open a foreign currency account abroad

Certificate of Incorporation or Foreign equivalent

Bylaws or Foreign equivalent

Board Resolution

Drivers License or Passport copies

Financial Institution agreements

Country specific documents

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Operating on a global platform

Simplify Cross-Border Payments with a Fully Integrated Treasury Platform

• Automate and gain full control over your FX payments

• Achieve convenience and efficiencies

• Reduce risks and the potential for error

• Lower costs

• Centralize reporting

• Leverage multiple payment channels

• FX wire transfers

• Cross-border ACH

• Centrally printed drafts

• Increase internal controls

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Closing remarks

With more and more business being transacted overseas, a company‟s success depends on efficiently operating on a

global scale.

By thinking, acting and competing globally a company can ensure that it has the right tools and policies in place to

accommodate international growth.

In practice, this includes but is not limited to the following;

– Transacting outside of the USD

– Putting a policy in place for managing exchange rate risk when appropriate

– Establishing an international platform that is both transparent, easy to use and can accommodate ongoing global

growth

– Consolidating and centralizing global decision making

– Working with a truly global institution and leveraging its footprint and capabilities internationally

• By having the right structure and tools in place, operating outside of the U.S. can be made easy.

• There is not one perfect model for every company. Instead, there are many variations based on common underlying

themes that can be structured to best fit a company‟s specific needs.