Foreign Exchange and Risk Management

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HSBC Bank USA, N.A.
Trade and Supply Chain
Trade & Supply Chain
Foreign Exchange and Risk
Management
May 2010
Major Risks Related to International Trade
 Political Risk
– War, civil disturbance, or revolution
– Expropriation
– Inconvertibility of local currency into dollars or other hard currency. (Transfer Risk)
 Commercial Risk/Business Risk
– Disputes between buyer and seller.
– Controlling title to goods pending payment.
– Customer illiquidity or insolvency
– Inability to finance company “investment” in export accounts receivable
– Control of quality of goods.
– Working capital tied up
– Increasing reliance on bank debt.
 Documentary Risk
 Interest Rate Risk
 Foreign Exchange Risk
– Foreign Exchange Risk noted as biggest barrier to trade growth over the next six months by
U.S. businesses, according to recent Trade Confidence Index
Foreign Exchange Market
 In today’s global market place, foreign exchange plays a significant role: 4
trillion U.S. dollars worth of currency is exchanged on a daily basis.
–
-Payments
–
-Investments cross-border
 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, global presence, extensive footprint and
local knowledge are characteristics to look for in your trade bank.
3
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
Why Use Foreign Exchange?
 Competitive edge
– Exporters enhance their customer base by allowing customers to pay in their
local currency.
 Improve profit margin
– Build hedging cost into 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.
5
How is Foreign Exchange Used?
 Use forward pricing to negotiate sales contracts
 Lock in forward pricing when sales contract is firm
 Match foreign exchange product to your particular trade cycle and predicted
cash flows
6
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.
EUR/USD
1.60
1.50
1.40
1.30
1.20
USD/BRL
1.10
4.00
1.00
3.50
0.90
0.80
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
3.00
2.50
2.00
1.50
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
7
Identifying Foreign Exchange Exposure
 The main sources of foreign exchange exposure:
– Paying 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 manifest itself in a number of different ways:
– decreased USD cash flows or margins,
– EPS or balance sheet volatility,
– overseas contract cancellations,
Developing a Strategy for Hedging & Risk Management
 Understanding 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..
 There are four risk management alternatives available:
– Spot Transaction.
– Forward Transaction
– Purchasing Vanilla Options
– Structured Products (ex. Collars, Participating Forward, etc.)
9
Developing a Strategy for Hedging & Risk Management
 Importance of an F/X policy
– Philosophy and process for managing cross-border exposure
 Cornerstones
– Cash management/online banking platform
– A view into F/X exposure
– Trade/Supply Chain techniques
– Manage payment risk
– Foreign exchange policy
– Manage exposure
 When to consider using foreign exchange techniques
– Frequency of foreign exchange trades/year
– 10-15/year
– Trade size – min. US$ 20,000 per transaction
What is the Bottom Line?
 Hedging can eliminate 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 can protect profits margins and eliminate
uncertainty of the value of cash flows.
 A company can 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.
11
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)
 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
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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.
13
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