FOREIGN EXCHANGE
S T R AT E G I E S TO H E L P
YOUR BUSINESS – ARE
Y O U R E A D Y TO G O
GLOBAL?
Tom Beube
Vice President
International Services
Wintrust Commercial Banking
312.291.2904
tbeube@wintrust.com
Sarah E. Grooms, CTP
Vice President
Treasury Management
Town Bank/Wintrust
262.369.8809
sgrooms@townbank.us
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials
Sponsored by:
FIRST THINGS FIRST… A QUIZ:
Who in the room has thought or said the
following:
“I don’t have foreign currency exposure – we price
everything in U.S. dollars.”
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
2
AGENDA
What we’ll cover today:
• Pro’s and Con’s of Hedging
• Market Liquidity
• Why USD Is Not Always Best
• Reasons people do or do not hedge
• Foreign Exchange/Currency Hedging Tools
• Cross-Border Trade Tools
• Questions
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
3
W H Y U . S . D O L L A R I S N O T A LW AY S
BEST
• Quiz answer: False!
•
•
•
•
• But many believe it to be true
More and more companies going global regardless of sales
size
Average daily turnover of global FX spot transactions reached
$1.5 trillion in 2010
Pricing in dollars does not mean there is no currency risk
Collection and Payment Exposure
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
4
M A R K E T V O L AT I L I T Y
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
5
M A R K E T V O L AT I L I T Y
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
6
MARKET LIQUIDITY
•
•
•
•
•
Currency markets are extremely liquid and transparent
London and New York are most prominent centers of activity
U.S. Dollar is the most liquid, followed by the Euro
Most currencies trade with a standard two day settlement
Majority of countries have floating exchange rates
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
7
W H Y D ON ’T YOU WAN T TO H ED GE?
40%
36%
35%
30%
30%
26%
25%
20%
15%
15%
14%
10%
4%
5%
0%
We don't do enough Perceived hassle
foreign business
outweighs benefits
Have not ever
considered it
Have considered;
don't know benefits
Aware of benefits;
don't know how to
manage risks
I thought this was
just for really huge
companies
Dec 2010 AMEX FX International Payments Trade Tracker Survey
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
8
PROS VS. CONS OF TRANSACTIONAL
HEDGING
Potential Benefits
• Cash Flow Predictability
• Budgeted Forecast
• Satisfies Risk Aversion
• Concentrated Risk(s)
• Margin Preservation
Potential Detractors
• Procrastination Hurts
• Accounting Concerns
• Long Run “Immateriality”
• Too Confusing
• Lack of Hedging
Framework
Dec 2010 AMEX FX International Payments Trade Tracker Survey
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
9
WHY YOUR FOREIGN CUSTOMERS
MIGHT LOVE IT
• Known amount being received by the beneficiary bank
• Beneficiary usually receives funds more quickly
• What this means for you: Better Pricing Terms!
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
10
Spot vs. forward currency hedging
S P O T V S . F O RWA R D
CURRENCY HEDGING
Treasury Management Essentials sponsored by Wintrust Commercial Banking
TYPICAL FX TRANSACTIONS &
PRODUCTS OF CHOICE
• Typical FX Transactions
• Sending payments to a supplier
• Receiving payments from buyers
• Managing currency risk
• FX Products of Choice
• Spot Transaction
• Fixed Date Forward
• Window Forward
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
12
FX PRODUCT TOOLKIT
• Spot transaction:
• Foreign currency trade for 1– 2 day settlement
• Fixed date forward:
• Foreign currency trade, locking in a specific conversion rate for
settlement in the future
• Maturities up to one year
• Notional amounts can be specified
• Window forward:
• Foreign currency trade, locking in a specific conversion rate for
settlement to occur over a “period of time” in the future.
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
13
W H AT I S A S P O T T R A N S A C T I O N ?
( A L S O C A L L E D S P O T C O N T R A C T, S P O T
TRANSACTION, FX SPOT)
• Contract of buying or selling the currency for settlement
•
(payment and delivery) on the spot date (normally two
business days after the trade date)
Funds are typically wired out same-day for settlement within
two business days (time zones, etc. – exception: USD/CAD)
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
14
WHEN WOULD I USE A SPOT?
Great For:
• One-time transaction
• Wildly varying amounts going to same vendor
• What if I have a long-term, multiple-shipment contract to
hedge?
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
15
W H AT I S A F O R W A R D C O N T R A C T ?
A foreign exchange forward contract is a contractual agreement between two
counterparties to exchange a fixed amount of one currency for a fixed
amount of another currency on a specific date(s) in the future. The
relationship between the two currency amounts is determined by the
exchange rate set on the day the contract is entered into (trade date). The
date on which the actual exchange takes place (settlement) is the value
date.
• Priced at a premium or discount off the current spot rate to account for
•
•
interest rate differentials in the home countries of the currency pair
Eliminates currency risk
Customized to the needs of the individual client
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
16
FORWAR D EXAMPL E
• ABC Company is expecting to receive a payment in CAD on
•
•
March1, 2012
Payment amount C$ 100,000
Current market rates:
• Spot rate
• Forward points
• All-in rate
1.0065
.0002 (’2 points’)
1.0067
Forward Points: Compensation for the interest rate differential in the home
countries (U.S. vs. Canada) of the currencies. If the Canadian interest rates are
higher than those in the U.S., the person holding the USD should be compensated
by the person holding the CAD.
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
17
FORWAR D C ASH FL OW S
• February 10, 2012 (trade date)
• ABC Company enters into a
• Cash Flow
• No cash flow impact
contract today to sell
• C$100,000 for value March 1,
2012 at a rate of 1.0067
•
•
•
•
March 1, 2012 (value date)
ABC Company delivers CAD
ABC Company account credited
US dollars C$100,000 @ 1.0067
• Cash Flow
• - C$ 100,000
• + $99,334.46
Note: The transaction is settled at the forward rate, which is equal to the spot rate
+/- the forward points. In this case, the forward rate is 1.0065 + .0002 = 1.0067
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
18
WINDOW OPTION
• Window Option (also known as a Window Forward)
• Allows a company to draw upon the forward contract, partial or in
•
•
whole, within a specific timeframe no longer than a 1 year window
Any balance may be “rolled over “ into a new contract or liquidated at
prevailing market rates
Enables importers/exporters to adjust for potential delays in receipts
or payments
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
19
A COUPLE WORDS OF CAUTION…
• The company is on the hook. This is insurance, not speculation.
Forwards, not Futures.
• Also, there is a credit risk component.
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
20
FOREIGN TRADE TOOLS
Treasury Management Essentials sponsored by Wintrust Commercial Banking
W H AT I S “ T R A D E F I N A N C E ” ?
• Trade Finance:
•
•
•
•
Trade Letters of Credit
Standby Letters of credit
Bankers Acceptance Financing
Documentary Collections
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
22
TYPES OF LETTERS OF CREDIT?
• Trade / Commercial
• Import or Export
• Standby
• Performance
• Financial
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
23
W H AT I S T H E D I F F E R E N C E ?
• Trade / Commercial LC
•
•
•
•
This LC is expected to be drawn on
Acts as the means for payment and exchange of title documents
Generally used for cross border movement of goods
Considered lower risk than a Standby as it is self liquidating and
secured by the underlying goods
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
24
W H AT I S T H E D I F F E R E N C E ?
• Standby LC
• Acts as security in the event something goes wrong
• Covering leasing payments, performance under a contract, non
•
payment of invoices, bid on a project, etc.
Higher risk than a commercial LC
• Often open for a year or more
• Drawn on when our borrower has failed to perform
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
25
W H AT A R E T H E A D VA N TA G E S O F A
TRADE LETTER OF CREDIT?
To the Importer:
• Documentary evidence that the ordered goods have been
shipped on time
• Assurance that necessary clearance documents will be
provided
• Payment deferred until goods are shipped and documents
presented
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
26
W H AT A R E T H E A D VA N TA G E S O F A
TRADE LETTER OF CREDIT?
To the Exporter:
• Payment protection
• Reliance on issuing bank’s credit rather than buyer’s
• Rapid, local source of repayment, if payable at a U.S. bank
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
27
W H AT A R E T H E A D VA N TA G E S O F A
S TA N D B Y L E T T E R O F C R E D I T ?
To the Beneficiary:
• Easy access to compensation in the event the applicant
defaults or fails to perform
• Reliance on issuing bank’s credit rather than Applicant
• Simple requirements to draw
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
28
W H AT A R E T H E A D VA N TA G E S O F A
S TA N D B Y L E T T E R O F C R E D I T ?
To the Applicant:
• Eliminates the need to provide cash security
• Beneficiary must present a draw request that can be used in
court if the drawing is unwarranted
• Can be used to facilitate business on an ongoing basis with
one letter of credit
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
29
W H AT I S A D O C U M E N TA R Y
COLLECTION?
A Documentary collection is the collection by a bank of funds due from a
buyer against the delivery of documents.
The bank, acting as agent for the seller (exporter), presents documents to
the buyer (importer) through that party's bank and in exchange receives
payment of the amount owed, or obtains acceptance of a time draft for
payment at a future date.
The liability of the bank under a documentary collection is primarily
restricted to following the seller's instructions in forwarding and releasing
documents against payment or acceptance.
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
30
H O W I S D O C U M E N TA R Y C O L L E C T I O N
DIFFERENT FROM AN L/C OR OPEN
ACCOUNT?
• Unlike a letter of credit, the bank does not assume any liability
•
to pay if the buyer does not want or is unable to pay
Compared to open account sales, the documentary collection
offers more security to the seller, but less than a letter of credit
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
31
W H AT A R E T H E A D VA N TA G E S O F A
D O C U M E N TA R Y C O L L E C T I O N ?
• Simple and inexpensive handling compared to letters of credit
• Often faster receipt of payment than open account terms
• Seller retains title to the goods until payment or acceptance is
made
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
32
W H AT A R E T H E D I S A D VA N TA G E S O F
D O C U M E N TA R Y C O L L E C T I O N ?
• If the buyer refuses or is unable to pay, the seller has three
options, which could be expensive:
• Find another buyer
• Pay for return transportation
• Abandon the merchandise
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
33
W H AT T Y P E S O F D O C U M E N TA R Y
COLLECTIONS ARE THERE?
• Documents against Payment (D/P) also known as "Sight Draft"
•
or "Cash against Documents” (CAD). The buyer must pay
before the collecting bank releases the title documents.
Documents against Acceptance (D/A). The buyer accepts a
time draft, promising to pay for the goods at a future date. After
acceptance, the title documents are released to the buyer.
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
34
W H AT A R E T H E S T E P S I N
D O C U M E N TA R Y C O L L E C T I O N ?
1. The buyer (importer) and seller (exporter) agree on the terms of sale,
2.
3.
4.
5.
6.
7.
8.
shipping dates, etc., and that payment will be made on a documentary
collection basis.
The exporter arranges for the delivery of goods to the port/airport of
departure.
Export documents and instructions are delivered to the exporter's bank by
the exporter.
Following the instructions of the exporter, the bank processes the
documents and forwards them to the buyer's bank.
The buyer's bank, on receipt of documents, contacts the buyer and
requests payment or acceptance of the trade draft.
After payment or acceptance of the draft, documents are released to the
buyer, who utilizes them to pick up the merchandise.
The buyer's bank remits funds to the seller's bank or advises that the draft
has been accepted.
On receipt of good funds, seller's bank credits the account of the exporter.
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
35
THE COLLECTION PROCESS
1. The contract is made between the importer and the exporter
2. The exporter sends the documents to his bank with instructions for delivery
3. The exporter's bank sends the documents to the importer's bank with instructions
that the documents can be handed over against payment or acceptance of a draft
4. The importer's bank hands the documents over to the importer when the conditions
have been fulfilled
5. The exporter receives payment
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
36
W H AT I F S H I P M E N T I S B Y A I R
FREIGHT?
An Air Waybill (AWB) is a straight consignment; it is not negotiable. The
buyer does not need the AWB to pick up the goods. In other words, the
buyer can obtain the merchandise without paying for it.
To avoid this possibility, when shipping by air, the AWB should always be
consigned to the buyer's bank. This prevents release of the merchandise
until such time as the buyer's bank issues an Air Release to the carrier.
This is done only after the buyer has made payment or accepted the draft.
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
37
QUESTION AND ANSWER TIME
T H A N K Y O U F O R AT T E N D I N G !
Treasury Management Essentials sponsored by Wintrust Commercial Banking
TYPICAL CURRENCIES TRADED
CURRENCIES WE CAN TRADE
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
39
TOM BEUBE
Tom Beube is Director of International Services at Wintrust Financial Corp. Tom
joined Wintrust in November of 2010 after spending 17 years with LaSalle Bank,
ABN AMRO Bank and Bank of America. He began his banking career with The
First National Bank of Chicago. During his time with ABN AMRO he spent four
years working in Asia. Three of those years were in Hong Kong and one in
Shanghai where he worked with multinational clients doing business in China, as
well as calling on Financial Institutions in the Asia Pacific region.
Tom is a graduate of the University of Iowa and currently resides in the Chicago
area with his wife and two children.
tbeube@wintrust.com
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
40
SARAH E. GROOMS, CTP
Sarah E. Grooms, CTP is a Vice President at Town Bank and has been with the bank
for eleven years. Sarah joined the staff of Town Bank in May of 2001. Sarah
graduated from Carroll University with a Bachelors Degree in Business-Finance. In
2005, Sarah completed the WBA’s Graduate School of Banking at UW-Madison, and
has additionally earned her Certified Treasury Professional (CTP) designation in order
to best assist clients. She is currently working on her Masters of Science in Applied
Economics at Marquette University with a specialization in International Business.
Sarah has spoken previously for TMANE (Boston), Windy City Summit (Chicago),
BizTech (Milwaukee), and the InBusiness Series (Madison) in addition to area
colleges, as well as appearing on “InBusiness Radio with Jody and Joan” and Fox6
News - Milwaukee. She is a 2012 Forty Under 40 recipient (Business Journal,
Milwaukee). She is a member of the AFP and WTMA and serves on the boards of the
LIFE Charter School, Tempo-Waukesha and The Women’s Center. She currently
resides near Milwaukee, WI with her husband and son.
sgrooms@townbank.us
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
41