Fx Example Analysis

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FX Hedging Decision

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Fx Example Analysis

  1. 1. Foreign Exchange Exposure Management & Reporting
  2. 2. FX Drivers <ul><li>Drivers of Foreign Exchange Hedging Strategy </li></ul><ul><ul><ul><li>1. Acquisition Debt is in USD. </li></ul></ul></ul><ul><ul><ul><li>2. Dependence on inter-company cash flows (trade and loans) from foreign subsidiaries to repay debt and cover operational expenses and investments in USD. </li></ul></ul></ul>
  3. 3. FX Exposures <ul><li>Primary Exposures/Flows </li></ul><ul><ul><ul><li>1. Inter-Company Trade – all inter-company trade receivables between CH US (“Corporate”) and subsidiaries is in a pre-determined settlement currency. Currency exposure sits with Corporate. </li></ul></ul></ul><ul><ul><ul><li>2. Inter-Company Loans – almost all inter-company loans are USD denominated. Currency exposure sits with Subsidiary debt issuer. </li></ul></ul></ul><ul><ul><ul><li>3. Inter-Company Dividends – almost all dividends are non-USD. Currency exposure sits with Corporate. </li></ul></ul></ul><ul><li>These exposures can be actual exposures or forecasted exposures. Each exposure/flow needs to be identified and associated with a specific instrument. </li></ul>
  4. 4. FX Policy <ul><li>FX Hedging Policy to cover the following items: </li></ul><ul><li>Hedging Objective </li></ul><ul><li>Hedgeable Exposures </li></ul><ul><li>Hedging Time Horizon </li></ul><ul><li>Authorized FX Derivatives </li></ul><ul><li>Cost Assessment </li></ul><ul><li>Ability to Adjust Positions </li></ul><ul><li>Performance Measurement </li></ul><ul><li>Counterparty Assessment </li></ul><ul><li>Approval Process </li></ul>
  5. 5. Exposures <ul><li>Action Exposure </li></ul><ul><li>Inter -Company Trade* Company that sells product – policy is to sell in the currency of customer </li></ul><ul><li>Inter-Company Loans Entity with Note (receivable or payable) in non-functional currency </li></ul><ul><li>Inter-Company Dividends Entity with foreign subsidiary whose functional currency is different that its own </li></ul><ul><li>* Most foreign exchange exposures are inter-company, however, other cross currency exposures can exist for capital and expenses. </li></ul>
  6. 6. FX Policy <ul><li>Hedging Objective </li></ul><ul><ul><li>Minimizing foreign exchange risk in cross currency exposures </li></ul></ul><ul><li>Hedgeable Exposures </li></ul><ul><ul><li>Third Party booked or forecasted exposures </li></ul></ul><ul><ul><li>Inter-Company booked or forecasted trade exposures </li></ul></ul><ul><ul><li>Booked or forecasted Inter-Company dividends </li></ul></ul><ul><ul><li>Booked or forecasted Inter-Company debt payments </li></ul></ul><ul><li>Hedging Time Horizon </li></ul><ul><ul><li>Variable, dependent upon </li></ul></ul><ul><ul><ul><li>Ability to forecast </li></ul></ul></ul><ul><ul><ul><li>Price & Liquidity of instrument </li></ul></ul></ul><ul><ul><ul><li>Changes in business </li></ul></ul></ul><ul><ul><ul><li>Risk appetite </li></ul></ul></ul>
  7. 7. FX Policy <ul><li>Authorized FX Derivatives </li></ul><ul><ul><li>Spot/Forward Contracts </li></ul></ul><ul><ul><li>Non-Deliverable Forwards </li></ul></ul><ul><ul><li>Purchased European Options </li></ul></ul><ul><ul><li>Range Forwards (Collars) </li></ul></ul><ul><ul><li>Purchased Average Rate Options </li></ul></ul><ul><ul><li>Exchange Traded Options </li></ul></ul><ul><li>Ability to Adjust Positions </li></ul><ul><ul><li>Passive </li></ul></ul><ul><ul><ul><li>positions based on exposure formula (generally a % of exposure) that is updated continuously </li></ul></ul></ul><ul><ul><li>Managed </li></ul></ul><ul><ul><ul><li>take position based on expectation of market direction or position </li></ul></ul></ul>
  8. 8. FX Policy <ul><li>Performance Measurement </li></ul><ul><ul><li>Monthly marked-to-market valuation of derivative </li></ul></ul><ul><ul><li>Quarterly marked-to-market valuation of underlying </li></ul></ul><ul><ul><li>Determine impact of Forecast error </li></ul></ul><ul><ul><li>Effective hedge rate versus booking rate </li></ul></ul><ul><li>Counterparty Assessment </li></ul><ul><ul><li>Must be a rated financial institution (minimum of Aa2/AA) </li></ul></ul><ul><ul><li>Quarterly evaluation of credit rating agency documents for updates </li></ul></ul><ul><li>Approval Process </li></ul><ul><ul><li>Policy Approval </li></ul></ul><ul><ul><li>Accounting & Tax Approval </li></ul></ul><ul><ul><li>Transactional Approval </li></ul></ul>
  9. 9. Inter-Company Trade <ul><li>Collection of Inter-Company trade receipts at Carestream US are necessary to cover operational and capital expenditures as well as debt and interest payments. </li></ul><ul><li>These receipts can be forecasted and therefore are hedgeable. </li></ul><ul><li>These receipts will grow as transfer pricing changes are implemented across the world. </li></ul><ul><li>Inter-Company netting process (ABN) will reduce transaction costs associated with settling these exposures. Funds will be remitted to the US in USD (after being converted at ABN). </li></ul><ul><li>These accounts will grow with the addition of Inter-Company interest payments and any future royalty/franchise/trademark payments. </li></ul>
  10. 10. Inter-Company Trade Parent Company USD Sub A EUR Sub B SEK Sub D USD Sub E CAD Sub C NOK Sub F EUR Sub G GBP Sub H CHF Inter-Company trade flows can be cross currency or same currency. Evaluation of net currency exposures is necessary to determine the correct hedge position.
  11. 11. Inter-Company Loans and Dividends <ul><li>Anticipated loan payments can be made under hedge accounting </li></ul><ul><ul><li>Must be comply with timing and scheduling of derivative, degree of likelihood must be high </li></ul></ul><ul><ul><li>Accounting would be on books of the entity that has the cross-currency exposure </li></ul></ul><ul><li>Dividends from non-USD entities can be hedged once they are announced, this provides certainty. </li></ul><ul><ul><li>Hedged at Corporate level </li></ul></ul>
  12. 12. Exposures Currency exposures from inter-company trade are spread across twelve Currencies. These vary from significant to minor.
  13. 13. Hedging Currency Exposure
  14. 14. Hedging Currency Exposure <ul><li>By hedging exposures that are at least USDE $M monthly using the scaled hedge structure, the portfolio reduces the impact of foreign exchange rates while reducing transaction and administration costs. This structure also provides the ability to raise or lower the minimum hedging exposure limits. </li></ul>

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