Foreign Exchange Risk Management . Timothy J. Gilbert Global Transaction Services Foreign Exchange Solutions 617-994-7185 [email protected] Agenda. Risks and Management of Exposure Products and Strategic Thinking. One Year EUR/USD…. Volatility in the Markets.
Volatility in the Markets
EUR -20% OVER 2 YEARS
While Short Term Currency Volatility Can Be Substantial, Observed Over Several Years, Currency Movement Can Significantly Impact The Competitive Position Of Global Companies, Importers And Exporters
Short term volatility, while still significant, is overshadowed by the long term trend, particularly with regard to competitive positioning.
Chart Data Source: Bloomberg
Establish Risk Management Policy
Establish Budget Rates
Evaluate Hedge Performance
Execute Hedging Strategy
Economic / Competitive Exposure
Payment in Yen
Receipt In Euros
GBP FunctionalTranslation Risk
US Local Operator
USD Costs/USD Pricing
Peso Costs/USD Pricing
CAD Costs/USD Pricing
Spot Contracts – Secured Settlement
Spot Contracts provide a contractual foreign exchange rate for a specific amount of currency for delivery (or sale) in one or two business days, depending on the country.
Forward Contracts offer a firm foreign currency conversion rate on a specified amount of currency for a specified date or range of dates.
Swap Contracts are typically used when the maturity of an existing forward contract needs to be shortened or extended.
Foreign Currency Options
Option Contracts give the customer the right, but not the obligation, to buy or sell a specific amount of currency against another at a predetermined strike price and at a specific maturity date.
Foreign Currency Accounts
Foreign Currency Accounts can offer flexibility in managing foreign cash flows by minimizing the need for currency conversions.
Cross-Border Payments and the need to be flexible with local currencies
More than $3 trillion in transactions processed per day
Risk for any company conducting cross-border payments
USD cash flow risk with global competition
Exporters at risk - USD cash flow
Payments delayed anticipating more favorable exchange rates
Lost sales opportunity due to customer choosing product priced in local currency
Importers at risk - USD cash flow
Overpayment or underpayment due to adverse currency fluctuation
High value at risk (speculative-driven vs. customer-driven)
To remain competitive companies should take steps to navigate the challenges of cross-border payments
Decrease risk and increase control by determining the best channel for processing payments
Consider technology for optimizing working capital
Evaluate Global payment solutions for flexibility and convenience with currency offering, foreign currency accounts, and network
Access to more advanced solutions in hedging and managing exposure