guide-to-foreign-exchange - Long Island Import Export Association

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Global Markets
Guide to Foreign
Exchange Markets
HSBC Foreign Exchange
2008 Euromoney Poll
HSBC is consistently ranked as
one of the top banks in the world
in FX. HSBC ranked #2 for Most
Impressive Approach to FX ,
Who’s Best Where category in
EMEA and Asia & Australia. We
were ranked within the top 3 in 26
of the other categories which
cements our overall ranking of
3rd for qualitative criteria.
 FX business operates out of our three main centers (New York, London and
Hong Kong)
 Our extensive geographic footprint (incorporating some 89 branches), and
expertise in many local markets give us an additional and unique insight into
developments all over the globe
Top 3:
GBP, HKD, CNY, Asian ccy’s,
Middle East ccy’s
Options Trading Strategies and
new ideas
Best FX-linked products
Most innovative and original
research and strategy
The Americas *
Europe *
Asia *

New York

London

Hong Kong

Canada

France

Japan

Brazil

Germany

Australia

Argentina

Russia

China

Mexico

Turkey

Thailand
EM Research and strategy

Chile

Israel

India
Most Innovative Hedging Strategy

Bermuda

Dubai

Korea

Saudi Arabia

Singapore

South Africa
Fwds: EM currencies, and both
over and under 1yr
Research and Analytics on online
platforms
Note: * Not exhaustive lists
2
HSBC Foreign Exchange
Foreign Exchange Market
 In today’s global market place, foreign exchange plays a significant role: more
than 3.2 trillion U.S. dollars worth of currency is exchanged on a daily basis..
If this figure includes your dollars, how you conduct international business
could significantly affect your bottom line.
 Foreign Exchange is one of the most liquid traded markets, with hundreds of
currency pairs.
 Prices available 24 hours a day, 7 days a week.
 No formal exchange for currencies. Trading is done over the counter in an
interbank market and via brokers.
 In this highly dynamic environment, HSBC plays an important role servicing
customers across the globe. Our global presence, extensive footprint and local
knowledge make us one of the best banks in FX.
3
HSBC Foreign Exchange
Who Uses Foreign Exchange?
Importers/Exporters
–Importers pay in the foreign currency
–Exporters receive payment in foreign currency
Multinational corporations
–Multinationals fund foreign subsidiaries and funds are repatriated back to
parent companies
International investors
–International investors hedge interest payments with forwards
Tour operators
–Tour operators book foreign travel in the local currency
Schools
–Schools make and receive tuition payments in foreign currency
4
HSBC Foreign Exchange
Why Use Foreign Exchange?
 Improve profit margin
– In agreeing to pay invoices in a foreign currency, US importers avoid paying the
margins for currency fluctuation and conversion that foreign exporters usually
build into their pricing.
 Negotiate better pricing
– Importers have the upper hand when they take the responsibility to pay a foreign
supplier in local currency.
 Reduce risk
– Diversifying your international supplier base reduces the risks associated with
doing business with a limited number of vendors, in a limited number of regions.
 Competitive edge
– Exporters enhance their customer base by allowing customers to pay in their
local currency.
5
Identifying Foreign Exchange Exposure
Understanding Foreign
Exchange Exposures
 A clear understanding of your foreign exchange exposure is necessary to assess risks.
Exposures arise as a result of exchange rate volatility.
USD/BRL
EUR/USD
4.00
1.60
1.50
3.50
1.40
1.30
3.00
1.20
2.50
1.10
1.00
2.00
0.90
0.80
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
1.50
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
 The main source of foreign exchange exposure for companies arises from meeting invoices
for goods and services priced in a foreign currency, or receiving foreign currency for goods
or services provided. Exposures can also arise from:
– Competitors having a cost base and/or selling their products in a foreign currency
– Overseas manufacturing plants or subsidiaries
– Overseas subsidiaries' foreign currency borrowing or surplus cash balances
 Exposure can materialize in a number of different ways: decreased USD cash flows or
margins, EPS or balance sheet volatility, overseas contract cancellations, etc.
6
Spot and Forward Transactions
Spot Transaction
Currency Pairs
Any currencies that are
freely traded
 A spot transaction is a binding obligation to buy or sell a certain amount of
foreign currency at the current market rate.
 Settlement is generally in two business days
Example:
Foreign Exchange Limit
Settlement limit required
– US client is buying €1,000,000 of imported goods from Germany
– Client calls HSBC and agrees to buy EUR / sell USD at 1.4675
– In two business days client delivers $1,467,500 to HSBC and HSBC delivers
€1,000,000 to an account the client specifies
7
Spot and Forward Transactions
Forward Transaction
Currency Pairs
All G20 currencies, may not
be available in certain EM
currencies
Tenor
Varies by currency pair
Foreign Exchange Limit
Required
 A forward transaction (or forward contract) is a binding obligation to buy or
sell a certain amount of foreign currency at a pre-determined rate of exchange,
on a certain date in the future.
 The price is based on the spot rate with an adjustment (forward points) which
represents the interest rate differential between the two currencies being
exchanged.
 In certain countries, forwards are available on a non-deliverable basis due to
restrictions. The market will determine the forward curve in such cases, rather
than interest rates.
Example:
– US client is buying goods from a customer in Brazil for BRL10,000,000 (nondeliverable) in 6 months.
– Client calls HSBC and agrees to buy BRL / sell USD at 1.8700 (spot 1.8070) in 6
months
– In six months BRL fixes at 1.9000. Client pays HSBC USD84,435.69 and converts
money locally in Brazil
8
Spot and Forward Transactions
“Time Option” Forward
Transaction
Currency Pairs
All G20 currencies, may not
be available in certain EM
currencies
Tenor
Varies by currency pair
Foreign Exchange Limit
Required
 A “time option” forward transaction is a binding obligation to buy or sell a
certain amount of foreign currency at a pre-determined rate of exchange, for a
“window” dates in the future rather than a specific value date.
 Allows for a specific time period during which cash flows can occur at a
predetermined rate of exchange.
– Windows are typically 30 days.
Example:
– US client is receiving payment from a customer in the UK for GBP10,000,000 on T+30
terms but is uncertain on the exact date of payment.
– Client calls HSBC and agrees to Sell GBP / buy USD at 1.5130 (spot 1.5134) in with
settlement for some date between today and 30 days from now.
– In 25 days customer makes payment. Client pays HSBC GBP10,000,000 and receives
USD15,130,000.
9
Hedging & Risk Management
Short Form Master
Agreement
 Non-market HSBC-generated document
 For use with US-domiciled ‘mom and pop’ corporate customers only (may
pose tax-related issues if used for offshore customers - IFEMA/FEOMA/ISDA
are preferred in those cases).
 Short-dated, infrequent FX trading only (e.g., 10 trades or less per year, limited
tenor - 6 months)
 Payment and close-out netting provisions, but not recognized in the industry or
within HSBC as a viable netting contract (i.e. no legal opinion support)
 No collateralization
 Unilateral treatment in favor of HSBC; terms typically non-negotiable
 Allows for payments to be made into escrow
 Covers FX spot, options, forwards
 Normally used for SME and core MME clients
10
Hedging & Risk Management
Developing a Strategy
 Having a clear appreciation of a company’s foreign exchange exposures allows
the identification of the exposures as they occur, and an assessment of the
potential impact on a company.
 Companies can hedge these exposures to minimize the foreign exchange
impact on their financials, cash flows, margins, EPS, etc..
 Using the products described here there are four risk management alternatives
available:
– Spot Transaction.
– Forward Transaction
– Purchasing Vanilla Options
– Structured Products (ex. Collars, Participating Forward, etc.)
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Hedging & Risk Management
Developing a Strategy
“Why not just use a forward, I am fully hedged
and can focus on my underlying business…”
 A forward implies a strong bias with linear returns
 There is an opportunity cost with a forward which mirrors that of doing nothing
(remaining unhedged);
– Executing a Forward contract represents an implicit bet that today’s market rates are
better than tomorrow’s levels
– If a company is 100% sure that FX rates will not go their way, an FX Forward offers the
ideal solution
– If a company is 100% sure that FX rates will go their way, then doing nothing is the
ideal approach
– If a company is unsure about where FX rates are going, option-based products offer
protection & flexibility
FX options on the other hand require initial premium
(many times a hurdle for risk managers)
12
How is Foreign Exchange Used?
 Use forward pricing to negotiate sales contracts
 Lock in forward when sales contract is firm
 Match foreign exchange product to your particular trade cycle and predicted
cash flows
13
What is the Bottom Line?
 Hedging foreign exchange risk is not speculating. Hedging eliminates the
uncertainty of the FX rate that will be used by a company in the future.
 A Foreign Exchange Forward contract allows a company to pay or receive
foreign currency in the future at an exchange rate agreed upon today.
 By locking in the rate, a company is protecting profits margins and eliminating
uncertainty of the value of cash flows.
 A company will know exactly how many U.S. dollars they will pay or receive
in the future, so they can better forecast their business’ cash flow cycle and
plan operations accordingly.
14
Disclaimer
PRODUCTS AND SERVICES ARE OFFERED BY EITHER HSBC BANK USA, MEMBER FDIC; OR HSBC SECURITIES (USA) INC. A
REGISTERED BROKER DEALER AND A REGISTERED FUTURES COMMISSION MERCHANT. HSBC SECURITIES (USA) INC. IS A
MEMBER OF THE NEW YORK STOCK EXCHANGE, NASD AND SIPC AND REGULATED BY THE SFA FOR THE CONDUCT OF
INVESTMENT BUSINESS IN THE UNITED KINGDOM.
HSBC BANK USA AND HSBC SECURITIES (USA) INC. ARE MEMBERS OF THE HSBC GROUP. ANY MEMBER OF THE HSBC
GROUP MAY FROM TIME TO TIME UNDERWRITE, MAKE A MARKET OR OTHERWISE BUY OR SELL AS PRINCIPAL
SECURITIES OR OTHER INSTRUMENTS MENTIONED HEREIN, OR TOGETHER WITH THEIR DIRECTORS, OFFICERS AND
EMPLOYEES MAY HAVE EITHER A LONG OR SHORT POSITION IN THE SECURITIES, COMMODITIES CURRENCIES OR OTHER
INSTRUMENTS MENTIONED IN THIS REPORT OR FUTURES OR OPTIONS CONTRACTS CONVERTIBLE INTO SECURITIES OR
OTHER INSTRUMENTS MENTIONED IN THIS REPORT, OR MAY PERFORM OR SEEK TO PERFORM INVESTMENT BANKING
SERVICES FOR THOSE COMPANIES MENTIONED HEREIN.
THE INFORMATION IN THIS REPORT IS DERIVED FROM A VARIETY OF SOURCES WE BELIEVE TO BE RELIABLE; HOWEVER,
WE CANNOT GUARANTEE ITS ACCURACY OR COMPLETENESS, NOR SHALL WE BE LIABLE FOR ANY INCIDENTAL OR
CONSEQUENTIAL LOSSES OR DAMAGES INCLUDING BUT NOT LIMITED TO ERRORS (INCLUDING ERRORS OF
TRANSMISSION), INACCURACIES, OMISSIONS, CHANGES IN MARKET FACTORS OR CONDITIONS, OR ANY OTHER
CIRCUMSTANCES BEYOND OUR CONTROL. THE INFORMATION, ANALYSIS AND OPINONS CONTAINED HEREIN
CONSTITUTE OUR PRESENT JUDGEMENT WHICH IS SUBJECT TO CHANGE AT ANY TIME WITHOUT NOTICE.
THIS REPORT IS INTENDED SOLELY FOR THE INFORMATION OF THE SPECIFIED ADDRESSEE, IS FOR PRIVATE CIRCULATION
AND NOT INTENDED FOR USE BY PRIVATE CLIENTS AS DEFINED BY THE SFA.
THIS IS NOT A RECOMMENDATION, OFFER OR SOLICITATION TO PURCHASE OR SELL ANY SECURITY, COMMODITY,
CURRENCY OR OTHER INSTRUMENT. THIS REPORT DOES NOT CONSIDER SPECIFIC OBJECTIVES, CIRCUMSTANCES OR
NEEDS OF INDIVIDUAL RECIPIENTS. RECIPIENTS OF THIS REPORT SHOULD SEEK FINANCIAL ADVICE REGARDING THE
APPROPRIATENESS OF INVESTING IN ANY SECURITY, COMMODITY, CURRENCY OR DERIVATIVE INSTRUMENT OR
STRATEGY CONTAINED HEREIN.
SECURITIES SPOT AND FORWARD FOREIGN EXCHANGE, CURRENCY OPTOINS, COMMODITIES AND CERTAIN OTHER
PRODUCTS DISCUSSED HERIN ARE NOT INSURED BY THE FDIC AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF HSBC
BANK USA, ARE NOT GUARANTEED BY HSBC BANK USA; AND ARE SUBJECT TO INVESTMENT RISKS INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
15
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