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International Business Strategies for Credit Professionals
 

International Business Strategies for Credit Professionals

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International Business Strategies for Credit Professionals was presented at the annual Legal Seminar For Credit Professionals, hosted by Kegler Brown in conjunction with NACM – Great Lakes Region ...

International Business Strategies for Credit Professionals was presented at the annual Legal Seminar For Credit Professionals, hosted by Kegler Brown in conjunction with NACM – Great Lakes Region and American Subcontractors Association. Kegler Brown global business attorneys Luis Alcalde and David M. Wilson joined Andy Arduini, senior vice president and director of structured trade finance at Huntington National Bank, in presenting the seminar. The presentation covered a multitude of topics, including: due diligence on the foreign borrower/customer; understanding the business and corporate structure of the foreign borrower to better cross-collateralize and obtain guarantees of payment; letters of credit; and export credit insurance.

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  • Why are we defining these? Do we use them later? Could this be combined with the nature of IT?
  • -list of several available organizational structures, take a moment on this slide to discuss the importance of research, culture and selecting the right local partner. Mention that we will likely hear several stories related to this topic during the panel discussion later today. Provide a list of some research tools. Should you vertically integrate?Acquire or develop capabilities rather than enter a joint venture?Integrate some or all of the value chain?Transaction CostsIs the exchange subject to high threats of opportunism due to high transaction specific investments?Is the exchange subject to high threats of opportunism due to uncertainty and complexity?CapabilitiesDo you have valuable, rare and costly to imitate resources? Real OptionsTo retain flexibility: exchanges characterized by high levels of uncertainty should not be vertically integrated
  • *This related to “getting paid” in a few ways. Sales people need to know this cold, to properly price the sale.
  • *This related to “getting paid” in a few ways. Sales people need to know this cold, to properly price the sale. Good reference guide from the ICC http://www2.miq.com/cms/INCOTERMS2013/
  • Address EXW / FCA differences, and reference export controls issuesSeller does not have to load the truckSeller does not have to secure some export filingsBUT, may still be required by US Government regulations. US Department of Commerce Bureau of Industry and Security (BIS) clarified roles of the parties.The US Principal Party in Interest (USPPI) is ALWAYS responsible for filing the Shippers Export Declaration (SED) (unless it is a “routed transaction”)USPPI is a person in the US that receives the primary benefit, monetary or otherwise of the transactionOne exception, it can be a foreign person/entity if they are in the US when the goods are purchased or obtained for export.SED is not completed electronically, we file export information (EEI) through the Automated Export System (AES or AES direct) often referred to as AES filing.Routed Export TransactionIf the foreign party wants you to use their forwarder (then foreign party is really controlling) (FTR 30.3 (e)). Then FPPI provides the power of attorney.Then they can authorize us as an agent to file an EEI through AES12 data elementsAsk them for the data elements in writing, and save it in the file.Then if you are ever investigated, the show them what you did (this is your due diligence) Then you will get a proof of filing number ITNMay not need to, but you need to make sure you have the exemption legend for customs.We will check the FTR to confirm it is exempt from filing.
  • *This related to “getting paid” in a few ways. Sales people need to know this cold, to properly price the sale. Good reference guide from the ICC http://www2.miq.com/cms/INCOTERMS2013/
  • The devil is in the details, and so are the dollars.
  • The devil is in the details, and so are the dollars.
  • -New Zealand was 1st (2011)-Denmark was tied for 1st with New Zealand & Singapore (2010)-Scale is 10 – 1 , 10 is best-Somalia is worst, tied with North KoreaLevel of CorruptionTransparency International 2012 CPI indexThe abuse of entrusted power for private gainPerception of corruption in public sector
  • Highlight this slide & mention it may be useful for them to come back to and analyze for their particular situation http://www.google.com/finance?q=USDBRL&ei=-qaHUeiMKNCdqwGRWQ
  • Mention Canada has a few differences. I believe the systems in Canada provide that Choice of Law determines perfection, rather than law of debtor’s location.Mexico resourceshttp://www.strasburger.com/calendar/news/banking/Mexico-new-secured-transactions-registry-secured-lending.htmwww.rug.gob.mx
  • Beneficiary (seller)Account party (buyer)Discuss case law of bank asking customer about waiver.
  • *This related to “getting paid” in a few ways. Sales people need to know this cold, to properly price the sale. Good reference guide from the ICC http://www2.miq.com/cms/INCOTERMS2013/
  • *This related to “getting paid” in a few ways. Sales people need to know this cold, to properly price the sale. Good reference guide from the ICC http://www2.miq.com/cms/INCOTERMS2013/
  • Note that beneficiary and account party roles are different with a SBLC (stand by letter of credit, essentially a performance bond).
  • *This related to “getting paid” in a few ways. Sales people need to know this cold, to properly price the sale. Good reference guide from the ICC http://www2.miq.com/cms/INCOTERMS2013/
  • *This related to “getting paid” in a few ways. Sales people need to know this cold, to properly price the sale. Good reference guide from the ICC http://www2.miq.com/cms/INCOTERMS2013/

International Business Strategies for Credit Professionals International Business Strategies for Credit Professionals Presentation Transcript

  • Background Due Diligence Foreign Liens Letters of Credit GETTING PAID WHEN SELLING INTERNATIONALLY @ LMAlcalde @ dwilsonjdmba Luis Alcalde, Esq. and David M. Wilson, Esq.
  • Getting Paid When Selling Internationally Background Definitions and Key Concepts Nature of International Transactions Due Diligence Foreign Buyer / Borrower Diligence Foreign Market Diligence Foreign Liens Identifying Foreign Liens Securing Your Transaction Letters of Credit Governing Laws and Rules Practical Legal Issues Background Due Diligence Types of International Transactions Foreign Liens Letters of Credit
  • Definitions and Key Concepts   Credit - the ability of a customer to obtain goods or services before payment (or full payment), based on the trust that payment will be made in the future. Credit risk - the danger that you will not receive an amount of money you are owed because the party that owes the money is unable to pay and defaults on the obligation.  Credit risk increases the further away in time the payment is expected since every day increases the possibility of events that may cause an inability to pay. Background Due Diligence Foreign Liens Letters of Credit
  • Definitions and Key Concepts  Credit exposure - The total amount of credit extended to a borrower by a lender.  The magnitude of credit exposure indicates the extent to which the lender is exposed to the risk of loss in the event of the borrower's default. Background Due Diligence Foreign Liens Letters of Credit
  • Nature of International Transactions   Goods, services, technology, contract rights, money and/or people are moving from one market or legal jurisdiction to another market or legal jurisdiction. The cross border nature of the trade and exchange means that at least the law of two jurisdictions or markets/countries apply to the transaction as well as principles of international law. Background Due Diligence Foreign Liens Letters of Credit
  • Nature of International Transactions Exports from a Market Equal Imports Into a Market Export Goods, Services, Technology, IP, People, Money from USA Import Goods, Services, Technology, IP, People, Money into Foreign Market Background Due Diligence Foreign Liens Letters of Credit
  • Nature of International Transactions Money Exporting Seller Importing Buyer Goods Background Due Diligence Foreign Liens Letters of Credit
  • Nature of International Transactions  Foreign market import laws re: goods, services, technology, IP, approval and registration of products, services, technology  US & Foreign Laws Affecting Cross Border Sale Transaction  Financial control laws re: foreign currency, foreign investments, transfer pricing, financial reporting, taxes, import duties and fees USA export laws re: goods, services, technology, IP  Export controls, ITAR, EAR  OFAC Background Due Diligence Foreign Liens Letters of Credit
  • Nature of International Transactions Laws Affecting the Private Relationship of Parties USA laws applicable to contracts, sale of goods, services, technology, IP, financing, resolving conflicts Foreign markets laws re contracts, sale of goods, services, technology, IP, solving conflicts International treaties on IP, Sale of Goods, Contracts, Resolving Conflicts, Taxes Background Due Diligence Foreign Liens Letters of Credit
  • Types of International Transactions Direct Sale from U.S. -Freight Forwarder -Trading Company Non-Equity Alliance -License -Agent -Distributor -Franchise -Joint venture Background Equity Alliance Wholly Owned Subsidiary -M&A -Greenfield -Brownfield -Joint venture -Joint company Due Diligence Foreign Liens Letters of Credit
  • Types of International Transactions  Incoterms®  What are Incoterms?   What do Incoterms address?    Contractual terms created by the International Chamber of Commerce (ICC) Identify the location in the supply chain where the risk of loss or damage transfers from seller to buyer. Identify the point in the supply chain where the responsibility for certain costs and obligations shift from the seller to the buyer. What is not covered by Incoterms?  Do not address when title to the goods transfers.   If applicable, should be addressed in separate contract clause. Do not transfer US export control compliance obligations.  Generally, US Principal Party In Interest responsible for filings. Background Due Diligence Foreign Liens Letters of Credit
  • Types of International Transactions  Best Practices  Understand where the risk of loss transfers.  Just because the seller pays for freight does not necessarily mean that the seller has the risk of loss while goods are being delivered. Understand who has responsibility for loading and unloading charges.  Understand who has responsibility for customs clearance, duties, and other charges.  Understand how these terms relate to your trade solutions (LC, documentary solutions, SBLC, bank guarantee – UCP 600).  Background Due Diligence Foreign Liens Letters of Credit
  • Types of International Transactions Background Due Diligence Foreign Liens Letters of Credit
  • Types of International Transactions  Best Practices  All information contained in the export documents should come from the original contract. • • • • • • • • • • Background Due Diligence Sales contract Purchase order AES System filings Commercial Invoice Packing List Bill of lading Insurance certificate Certificate of origin Certifications Letter of credit Foreign Liens Letters of Credit
  • Types of International Transactions Exports from a Market Equal Imports Into a Market Export Goods, Services, Technology, IP, People, Money from USA Import Goods, Services, Technology, IP, People, Money into Foreign Market Background Due Diligence Foreign Liens Letters of Credit
  • Types of International Transactions  Best Practices  All information contained in the export documents should come from the original contract.  One party’s export becomes another party’s import. • Commercial Invoice • Used by customs for product classification • Used by bank for paying on letter of credit Background Due Diligence • • • • • • • • • • Sales contract Purchase order AES System filings Commercial Invoice Packing List Bill of lading Insurance certificate Certificate of origin Certifications Letter of credit Foreign Liens Letters of Credit
  • Types of International Transactions  Best Practices  Commercial • • • • • • • • • • Invoice Checklist USPPI name and address Consignee (buyer) Intermediate consignee (delivery party, notify party, often FF) Forwarding party Commercial invoice number Customer PO Number Bill of laden or air bill number Country of origin Date of export or invoice date Incoterm Background • • • • • • • • • • • Sales price Currency of sale Terms of payment Port (airport) of export Export carrier Quantity Unit of measure Weight Product description HS number Export control contract clause Due Diligence Foreign Liens Letters of Credit
  • Foreign Buyer and Foreign Market Diligence Background Definitions and Key Concepts Nature of International Transactions Due Diligence Foreign Buyer / Borrower Diligence Foreign Market Diligence Foreign Liens Identifying Foreign Liens Securing Your Transaction Letters of Credit Governing Laws and Rules Practical Legal Issues Background Due Diligence Types of International Transactions Foreign Liens Letters of Credit
  • Foreign Buyer and Foreign Market Diligence  Threshold Questions  Has the risk analysis identified any general or specific credit risks?  What is reasonable under the circumstances? Background Due Diligence Foreign Liens Letters of Credit
  • Foreign Buyer and Foreign Market Diligence     Government & political environment Judicial system Transparency, fairness, rule of law Foreign exchange rates and monetary controls The unit of measurement for political risk is STABILITY Political Risk • The ability of government to respond to political risk • The ability of government to NOT cause political risk Background Due Diligence Foreign Liens Letters of Credit
  • Foreign Buyer and Foreign Market P E S T Diligence The unit of measurement for political risk is STABILITY Political Risk • The ability of government to respond to political risk • The ability of government to NOT cause political risk Denmark 1st USA 19th Chile 20th Brazil 69th China 80th Background Colombia 94th Due Diligence India 94th Russia 133rd Foreign Liens North Korea, Somalia 174th Letters of Credit
  • Foreign Buyer and Foreign Market P E S T Diligence  Currency Risk exposure – commitment to make payment at future date  Transaction  Solutions    Forward Contracts to supply at future date at set price in a specified currency Risk Sharing Clauses in long term supply contracts which address sharing the risk of specific variables Foreign Currency Options to buy foreign currency in future at set price Background Due Diligence Foreign Liens Letters of Credit
  • Foreign Buyer and Foreign Market Diligence  Prepare credit risk profile.  Aggregate amount of risk of the buyer/borrower, payment history, current capacity to repay based on historical and future projections.  Obtain written information from buyer and written consent to contact local bank and references. Background Due Diligence Foreign Liens Letters of Credit
  • Foreign Buyer and Foreign Market Diligence  Request relevant information from buyer.  In many countries information is inaccessible or difficult to access.  China has no system for collecting & assessing credit histories or even accessing criminal or land records.  Many countries do not recognize “private investigations” and consider them illegal. Background Due Diligence Foreign Liens Letters of Credit
  • Foreign Buyer and Foreign Market Diligence      Identify all principal owners. Identify all parent, subsidiary & affiliated entities. Identify all entities related through common ownership of principal owners or close relatives. Determine whether borrower is a State Owned Enterprise (“SOE”) or if there is any government ownership or control over the borrower. Ensure legal capacity.  This can be particularly tricky in foreign jurisdictions as many countries incorporate a Legal Representative framework, which provides that only the designated Legal Representative may bind the company. Background Due Diligence Foreign Liens Letters of Credit
  • Foreign Liens Background Definitions and Key Concepts Nature of International Transactions Due Diligence Foreign Buyer / Borrower Diligence Foreign Market Diligence Foreign Liens Identifying Foreign Liens Securing Your Transaction Letters of Credit Governing Laws and Rules Practical Legal Issues Background Due Diligence Types of International Transactions Foreign Liens Letters of Credit
  • Foreign Liens  Two common issues when selling abroad  Searching for secured debts  Securing your transaction Background Due Diligence Foreign Liens Letters of Credit
  • Foreign Liens  In the US  Transparent records and recording systems    Federal and State tax liens are searchable Stable and fairly uniform legal structure - Uniform Commercial Code Outside of the US   Countries where information is available often require taxpayer consent to release. The UCC does not control.  Generally, the laws of the jurisdiction in which the debtor is located govern perfection of security interests in personal property (UCC 9-301). Background Due Diligence Foreign Liens Letters of Credit
  • Foreign Liens  UCC Equivalence Test  If the laws of the debtor’s country are not equivalent to the US, then the debtor may be deemed to reside in the District of Columbia.   The secured party is essentially excused from compliance with non-US law and may perfect its interest in the District of Columbia.* The equivalence test assesses whether the foreign jurisdiction requires a foreign filing and whether recording or registration is equivalent to Rev. Article 9 of the UCC  “Generally requires information concerning the existence of a non-possessory security interest to be made generally available in a filing, recording, or registration system as a condition or result of the security interest’s obtaining priority over the rights of a lien creditor with respect to the collateral.” Background Due Diligence Foreign Liens Letters of Credit
  • Foreign Liens  If I file in the District of Columbia, am I ok?  Additional information is required to determine whether a secured party can achieve priority by registering its interest in the collateral under foreign or Washington D.C. law.  Foreign law may not recognize security interests in the type of collateral, or in favor of the type of secured party.  Contractual choice of law clauses may not be given effect to alter the law that otherwise would govern perfection over security interests. Background Due Diligence Foreign Liens Letters of Credit
  • Foreign Liens  Summary of select systems  Canada    Ontario enacted the PPSA based on UCC Article 9 (all Canadian common law jurisdictions have followed) Quebec (civil law jurisdiction) has a civil code which parallels the PPSA. Mexico  Registro Único de Garantías Mobiliarias (RUG) - Largely based on recommendations from UN Commission on International Trade Law (Executive decree issued September 23, 2010 implementing the amendments)    Unified registry of movable property Previously filed security interests in local registries are still effective. Pledge System (much of South America)      Perfection is generally by possession Transaction filing – generally, lender must file copy of entire loan agreement Generally requires new filing at each stage or modification of a transaction Generally cannot contain floating security interest Narrow collateral descriptions (generally, must be the same “specie” as the original) Background Due Diligence Foreign Liens Letters of Credit
  • Foreign Liens  Solutions  Obtain guarantees from parent, subsidiary, affiliate or common ownership company, or individuals located in U.S. or more legally secure or transparent jurisdictions.  Obtain liens or rights over collateral located in U.S. or more legally secure or transparent jurisdictions. Background Due Diligence Foreign Liens Letters of Credit
  • Letters of Credit Background Definitions and Key Concepts Nature of International Transactions Due Diligence Foreign Buyer / Borrower Diligence Foreign Market Diligence Foreign Liens Identifying Foreign Liens Securing Your Transaction Letters of Credit Governing Laws and Rules Practical Legal Issues Background Due Diligence Types of International Transactions Foreign Liens Letters of Credit
  • Letters of Credit  Letter of credit (LC) characteristics:  Offers the most protection to the seller.  Substitutes the creditworthiness of an overseas buyer with that of a bank.  Depending on the type of LC, the bank that pays on behalf of the buyer may be at origin or at destination.  Banks deal in documents only.    Payment is independent of the physical movement of the related goods. Buyer’s recourse for problems with goods is to the contract with the Seller. Three independent “agreements” underline a letter of credit.  between buyer and seller (their contract)  between applicant and issuing bank (application and reimbursement agreement)  between issuing bank and beneficiary (the LC) Background Due Diligence Foreign Liens Letters of Credit
  • Letters of Credit  Relevant laws and rules Article 5 of the Uniform Commercial Code  Uniform Customs and Practice for Documentary Credits (UCP)  Published by the International Chamber of Commerce (I.C.C.)  The UCP is not law, rather a detailed restatement of “custom” in the industry.  However, the UCP may apply. Some states have enacted a non-uniform amendment to UCC Article 5, which states that unless otherwise agreed, Article 5 does not apply to a letter of credit if the UCP is incorporated by reference into the documentary credit.  Background Due Diligence Foreign Liens Letters of Credit
  • Letters of Credit  Example of LC use in practice    Buyer requests extended payment terms of 90 days from date of shipment. Seller counters that it will not offer such terms on open account basis, but would consider such terms if buyer provides acceptable LC and agrees to absorb the associated additional costs of financing. Seller talks with its bank, to obtain pricing for credit/finance driven fees associated with this arrangement:       Confirmation fee Acceptance commission Discount charges Buyer’s bank issues the LC Seller’s bank is the confirming bank LC is payable via a time draft to be drawn at 90 days from date of bill of lading Background Due Diligence Foreign Liens Letters of Credit
  • Letters of Credit  Background Terms  Clean letter of credit  Requires no bill of lading.  Documentary  Requires  Clean letter of credit a bill of lading. Bill of Lading.  A clean bill of lading requirement cannot be met by a “foul bill of lading,” in which the carrier has noted that there is patent damage to the cartons shipped. Background Due Diligence Foreign Liens Letters of Credit
  • Letters of Credit  Irrevocable documentary letter of credit    Sight letter of credit   Does not restrict the beneficiary’s right to transfer its rights thereunder. Special letter of credit   Payable at a certain time, such as: six months following presentation of documents. General letter of credit   Payable on demand Time letter of credit   Most common in international commercial transactions. Documentary letters of credit may also be “revocable,” giving the beneficiary a right to payment “unless previously canceled” by the account party. Limits permissible transfers, usually to one or more banks. Fixed letter of credit  May become “exhausted” either when drafts for payment have been drawn by the beneficiary for the full amount of the letter or when the time period for drawing upon the letter has expired. Background Due Diligence Foreign Liens Letters of Credit
  • Letters of Credit  Common broker issue Often have two transactions with the same goods.  If both sales transactions involve payment by LC, then broker will be the beneficiary (seller) of the LC in the first transaction, and the account party (buyer) in the second.   Broker solution  Back to back credit If the documents required by each LC are identical, then broker can assign its rights in the first transaction to the issuing bank of the second LC.  May enable broker to purchase the goods from supplier with credit of its buyer.  Background Due Diligence Foreign Liens Letters of Credit
  • Legal Advice  The content of this presentation is for educational purposes only. Each legal issue is fact dependent, THIS PRESENTATION SHOULD NOT BE USED OR VIEWED AS LEGAL ADVICE; your legal counsel should be consulted on the application of your particular factual situation to the current law.  Copyright: 2013 Kegler, Brown, Hill & Ritter Co, LPA Background Due Diligence Foreign Liens Letters of Credit
  • Background Due Diligence Foreign Liens Letters of Credit GETTING PAID WHEN SELLING INTERNATIONALLY @ LMAlcalde @ dwilsonjdmba Luis Alcalde, Esq. and David M. Wilson, Esq.
  • Selling Internationally Balancing Risk & Competitiveness Andy Arduini Senior Vice President Director – Structured Trade Finance October 24, 2013
  • Setting the Scene • President ’ s National Export Initiative calls for doubling of exports between 2010 and 2015. • Year-over-year growth rate for last 3 years is 17.1% • U.S. exports very significant; $2.2 trillion in 2012. • Ohio was 9th largest exporting state in 2012 with $48.5B in exports. • The International Monetary Fund forecasts that 87% of world economic growth will take place outside of the U.S. over the next 5 years. 44
  • Setting the Scene (continued) 45
  • Primary Risks • Not getting paid. • Losses resulting from currency fluctuations. Most Overlooked Risk • Lost revenue due to uncompetitive terms. 46
  • Getting Paid: Risk vs. Competitiveness Least Risk Common Payment Methods Least Competitive CASH IN ADVANCE LETTER OF CREDIT CASH AGAINST DOCUMENTS OPEN ACCOUNT Most Risk Most Competitive 47
  • Letter of Credit • Payment method that has evolved over centuries of international commerce. • Governed by standard rules (UCP 600). • Very effective tool to eliminate commercial risk while selling internationally. • Can be significant competitive impediment in many markets. • Does not protect against Country/Political Risk. 48
  • Open Account / Cash Against Documents • Most competitive but risky payment method for selling internationally. • Cash Against Documents allows you to control the delivery of goods, but does not guarantee payment or return of goods to you in a default. • Does not protect against Commercial or Country/Political Risk. • Risks can be lowered through ExIm Bank Credit Insurance & Foreign Buyer Financing Progams. 49
  • ExIm Bank • Export-Import Bank of the United States. • Mission is to assist in financing the export of U.S. goods and services to international markets. • Supported more than $450 billion of U.S. exports, primarily to developing markets worldwide, in its 77 year history. • Authorized a historic total of $35.7 billion in loans to support U.S. exports in 2012 (10% increase over 2011). • Provides export credit insurance and loan guarantees. 50
  • Should I insure A/R? • Often the only uninsured asset • Frequency of loss generally the highest of all assets • Magnitude and frequency of loss often magnified when selling internationally where legal remediation is more complicated • Highly sensitive to changes in the business cycle • Lifeblood of a company’s cash flow position • Often critical to repay short-term borrowing 51
  • ExIm Short Term Credit Insurance • Over $2B in policies authorized in 2012. • Available to exporters whose product contains more than 50% U.S. content. • Coverage generally 95%. Covers commercial and political risk. • Terms up to 180 days for consumable products and 360 days for some bulk agricultural products and capital equipment. • Available as single buyer policy or multiple buyer policy. 52
  • Should I give a loan to a foreign customer? • Great sales tool but can be a very risky proposition. • Commercial and political risk magnified exponentially as tenor increases. • Credit analysis can be complicated given regional differences in accounting standards. • Can be difficult and expensive to perfect a security interest in foreign collateral. • Can be problematic and expensive to collect bad debts. 53
  • ExIm Foreign Buyer Financing • A U.S. based bank provides a direct loan to a foreign customer of a U.S. exporter on that is backed by a 100% ExIm guarantee. • Non-recourse financing. The U.S. exporter has no responsibility for the loan once funded. • Often very competitive financing in emerging markets where rates are higher and access to funding more difficult. • Maximum advance rate of 85% with matching U.S. content requirement. Term is generally 5 to 7 years. 54
  • Foreign Exchange: Risk vs. Competitiveness Two Options Least Competitive Least Risk SELL IN U.S. $ SELL IN FOREIGN CURRENCY Most Risk Most Competitive 55
  • Does selling in USD eliminate risk? • Depends on how you define risk. • It will protect you from currency valuation differences as it transfers this risk to your customer. • Will cause you to lose sales as some prospective clients will not be amenable to taking this risk. • Can expose you to risk during times of extraordinary fluctuation in currency values. Many lessons learned during the great recession. 56
  • Foreign Exchange Strategy • Eliminate foreign currency risk for both parties. Best of both worlds approach can eliminate both valuation and loss of revenue risk. • Discuss hedging strategies with a capable bank. There are many ways to sell in a foreign currency and not take foreign currency risk. 57