3. Case Debrief
• Barramundi Cycling Company
– Location: Berkeley, CA
– CEO: Adam Munguia
• Conditions
– Ensure 25% profit margin
– Provide Inventory for 10 Northern California stores
– 50% of payment due now
– Remaining 50% of payment due 60 days after delivery (October 1st)
• Service needed
– Foreign Exchange Advice between AUD/USD
– Hedge the risk for import payments
3
7. Comparison
Factors Indirect Guarantee Direct Guarantee
Costs &
Fees
• More expensive
• Fees would be charged
by BOW to client, taxes
• Less expensive
• No fees, no cost charged
to client from BOW
Importer’s
Risk
• More protection due to
guarantee received from
U.S. bank for the importer
• Risk is situational,
depends on stability of
foreign bank
8. Direct Guarantees
8
• Applicable to first 50% payment
• Ensures the buyer receives a refund if supplier fails to
deliver goods (bikes) to buyer
Advance
Payment
Guarantee
• Applicable to remaining 50% payment
• Ensures buyer receives a refund if the delivered goods do
not meet certain performance expectations
• Valid until 6 months after delivery date
• Recourse on faulty product or incorrect shipped inventory
Performance
Guarantee
10. Currency Hedging
10
Why Currency Hedging is important
• Increase certainty when determining returns of investment by mitigating the risk from
fluctuating rate changes
How It Works
• Forward Contract
• Allows purchaser to lock in an exchange rate to buy currency at future exercise date
• Most cost efficient and conservative way to hedge
• Simple and straightforward
• Low transaction cost
Recommendations
• Forward Contract
• Paying with AUD to maximize cost efficiency
12. Revolver
• A revolver is a line of credit that allows customer to use funds when needed.
Balance is carried from month to month.
• Example: Spend $1000, repay $300 and carry over to the next month a
balance of $700 plus interest. Next month spend $1000, repay $400, carry
over to the next month a balance of $1,300 plus interest.
• Bank of the West Revolver Product:
– Available up to $20,000,000
– Interest: 2% rate annually continuous compounded
12
13. 13
June 2nd
July
August
September
1st
October
3th
November
1st
December
1st
Note:
• The rate has taken into account the bank fee
• Details see the appendix
Pay required 50% of total
payment with the spot
rate of 0.723 on 6/2/2016
Pay remaining 50% of
total payment
Payment Scheme Option 1
Exercise date 09/01/2016 10/03/2016 11/01/2016 12/01/2016
Forward Period 3M 4M 5M 6M
Forward Rate 0.718732 0.720089 0.719442 0.718814
14. 14
June 2nd
July
August
September
1st
October
3th
November
1st
December
1st
Note:
• The rate has taken into account the bank fee
• Details see the appendix
Pay required 50% of total
payment with the spot
rate of 0.723 on 6/2/2016
Pay 12.5% of total
payment
Pay remaining 37.5%
of total payment
Payment Scheme Option 2
Exercise date 09/01/2016 10/03/2016 11/01/2016 12/01/2016
Forward Period 3M 4M 5M 6M
Forward Rate 0.718732 0.720089 0.719442 0.718814
15. Total Cost
15
• Option 1 offers total cost of $12,133,131;
• Option 2 offers total cost of $12,133,302, with a difference of $172
Exercise date 09/01/2016 10/03/2016 11/01/2016 12/01/2016
Forward Period 3M 4M 5M 6M
Forward Rate 0.718732 0.720089 0.719442 0.718814
Inputs Date Market rate Bank Fee Actual Payment Rate
USD/AUD 06/02/2016 0.723 35 bps 0.7265
Date Amount Total Cost
Option 1 06/02/2016 USD 6,084,437.50
12/01/2016 USD 6,048,693 12,133,131$
Option 2 06/02/2016 USD 6,084,437.50
09/01/2016 USD 1,512,345
12/01/2016 USD 4,536,520 12,133,302$
Difference 172$
16. Why Payments on a Later Date Saves More Money
16
AUDUSD Historical Correlation with
1) U.S. economy presented by S&P 500 Index, U.S. Unemployment rate
2) Other major currencies (EURUSD)
US Unemployment
S&P 500
AUDUSD Moving Weighted Average
EURO Currency Trust
AUDUSD Historical Monthly Closed Rates (As of June 2nd, 2016)
18. Recommendation
• Use Forward Contract
• Taking into account all risk factors and their potential impact on your business, we
recommend Payment Scheme Option 1 because it minimizes client’s credit and total
payment exposures, especially when client hasn’t generated sales
• Direct Guarantees:
– Advanced Payment Guarantee
– Performance Guarantee
18
June 2nd
July
August
September
1st
October
3th
November
1st
December
1st
Pay required 50% of total
payment with spot rate of 0.723
on 6/2/2016
Pay remaining 50% of
total payment at the
rate of 0.718814
Exercise date 09/01/2016 10/03/2016 11/01/2016 12/01/2016
Forward Period 3M 4M 5M 6M
Forward Rate 0.718732 0.720089 0.719442 0.718814
19. Pricing
• Target: 25% Profit Margin
• Cost per bike unit takes into account the best payment scheme (Option 1)
– With a total payment of USD12,133,131
• The gross profit margin aligns with the average margin sales on bikes among U.S. bike
dealers from the National Bicycle Dealers Association (NBDA)
• Total cost includes operating costs, depreciation and amortization and tax (10% of
taxable income)
• Estimated profit margin for each type of bicycle roughly exceeds the 25% target
19
per unit R100 R200 R500 R1000
Revenues/ sales price 949.00$ 1,549.00$ 2,749.00$ 9,049.00$
COGS/ Cost per unit 542$ 903$ 1,625$ 5,417$
Gross Profits 407.33$ 646.21$ 1,123.98$ 3,632.26$
Gross Profits Margin 43% 42% 41% 40%
Total Cost (Inc. Tax) 140.42$ 210.55$ 350.82$ 1,087.23$
Profit 266.91$ 435.66$ 773.16$ 2,545.03$
Profit Margin 28% 28% 28% 28%
20. Resources/References Used
20
Online Sources
Investopedia http://www.investopedia.com/terms/c/currencyforward.asp
XE http://www.xe.com/currency/aud-australian-dollar
Dailyfx https://www.dailyfx.com/aud-usd
Yelp https://www.yelp.com
City of Berkeley http://berkeley.cityapplications.com
National Bicycle Dealers Association http://nbda.com/
External Sources
Adam Munguia
Aditya Prakash
Andres Bergero
Ian Broff (SF office)
Ritwik Roy
23. Appendix
23
Assumptions:
First 50% Payment:
Minimum balance Oustanding 6,154,322.01$ USD
Spot Rate 0.72270 USD/AUD
Traded rate 0.72300 USD/AUD
Date 06/02/2016
Assuming the client would schedule to pay off all the loan payment by December 31st
24. Appendix
24
0M 6M 5M 4M 3M
0.7265 0.722232 0.723589 0.722942 0.722314
1 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,141,654$
1 Second 12.50% -$ 1,512,173$ -$ -$ -$
1 Third 37.50% -$ -$ 4,545,043$ -$ -$
2 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,137,590$
2 Second 12.50% -$ 1,512,173$ -$ -$ -$
2 Third 37.50% -$ -$ -$ 4,540,979$ -$
3 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,133,646$
3 Second 12.50% -$ 1,512,173$ -$ -$ -$
3 Third 37.50% -$ -$ -$ -$ 4,537,035$
4 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,135,972$
4 Second 12.50% -$ -$ 1,515,014$ -$ -$
4 Third 37.50% -$ 4,536,520$ -$ -$ -$
5 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,140,431$
5 Second 12.50% -$ -$ 1,515,014$ -$ -$
5 Third 37.50% -$ -$ -$ 4,540,979$ -$
6 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,136,487$
6 Second 12.50% -$ -$ 1,515,014$ -$ -$
6 Third 37.50% -$ -$ -$ -$ 4,537,035$
7 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,134,617$
7 Second 12.50% -$ -$ -$ 1,513,660$ -$
7 Third 37.50% -$ 4,536,520$ -$ -$ -$
8 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,143,141$
8 Second 12.50% -$ -$ -$ 1,513,660$ -$
8 Third 37.50% -$ -$ 4,545,043$ -$ -$
9 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,135,132$
9 Second 12.50% -$ -$ -$ 1,513,660$ -$
9 Third 37.50% -$ -$ -$ -$ 4,537,035$
10 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,133,302$
10 Second 12.50% -$ -$ -$ -$ 1,512,345$
10 Third 37.50% -$ 4,536,520$ -$ -$ -$
11 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,141,826$
11 Second 12.50% -$ -$ -$ -$ 1,512,345$
11 Third 37.50% -$ -$ 4,545,043$ -$ -$
12 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,137,762$
12 Second 12.50% -$ -$ -$ -$ 1,512,345$
12 Third 37.50% -$ -$ -$ 4,540,979$ -$
13 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,138,813$
13 Second 25% -$ 3,024,347$ -$ -$ -$
13 Third 25% -$ -$ 3,030,029$ -$ -$
14 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,136,104$
14 Second 25% -$ 3,024,347$ -$ -$ -$
14 Third 25% -$ -$ -$ 3,027,320$ -$
15 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,133,474$
15 Second 25% -$ 3,024,347$ -$ -$ -$
15 Third 25% -$ -$ -$ -$ 3,024,690$
16 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,138,813$
16 Second 25% -$ -$ 3,030,029$ -$ -$
16 Third 25% -$ 3,024,347$ -$ -$ -$
17 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,141,786$
17 Second 25% -$ -$ 3,030,029$ -$ -$
17 Third 25% -$ -$ -$ 3,027,320$ -$
18 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,139,156$
18 Second 25% -$ -$ 3,030,029$ -$ -$
18 Third 25% -$ -$ -$ -$ 3,024,690$
19 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,136,104$
19 Second 25% -$ -$ -$ 3,027,320$ -$
19 Third 25% -$ 3,024,347$ -$ -$ -$
20 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,141,786$
20 Second 25% -$ -$ -$ 3,027,320$ -$
20 Third 25% -$ -$ 3,030,029$ -$ -$
21 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,136,447$
21 Second 25% -$ -$ -$ 3,027,320$ -$
21 Third 25% -$ -$ -$ -$ 3,024,690$
22 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,133,474$
22 Second 25% -$ -$ -$ -$ 3,024,690$
22 Third 25% -$ 3,024,347$ -$ -$ -$
23 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,139,156$
23 Second 25% -$ -$ -$ -$ 3,024,690$
23 Third 25% -$ -$ 3,030,029$ -$ -$
24 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,136,447$
24 Second 25% -$ -$ -$ -$ 3,024,690$
24 Third 25% -$ -$ -$ 3,027,320$ -$
25 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,151,003$
25 Second 25% -$ 3,024,347$ -$ -$ -$
25 Third 0 -$ -$ -$ -$ -$
TotalT Payment
Payment
Scheme
Payment
Spot/Forward rates
25. Appendix
25
0M 6M 5M 4M 3M
0.7265 0.0035 0.0035 0.0035 0.0035
26 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,156,685$
26 Second 25% -$ -$ 3,030,029$ -$ -$
26 Third 0% -$ -$ -$ -$ -$
27 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,153,976$
27 Second 25% -$ -$ -$ 3,027,320$ -$
27 Third 0% -$ -$ -$ -$ -$
28 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,151,346$
28 Second 25% -$ -$ -$ -$ 3,024,690$
28 Third 0% -$ -$ -$ -$ -$
29 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,153,844$
29 Second 12.50% -$ 1,512,173$ -$ -$ -$
29 Third 12.50% -$ -$ 1,515,014$ -$ -$
30 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,152,489$
30 Second 12.50% -$ 1,512,173$ -$ -$ -$
30 Third 12.50% -$ -$ -$ 1,513,660$ -$
31 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,151,174$
31 Second 12.50% -$ 1,512,173$ -$ -$ -$
31 Third 12.50% -$ -$ -$ -$ 1,512,345$
32 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,153,844$
32 Second 12.50% -$ -$ 1,515,014$ -$ -$
32 Third 12.50% -$ 1,512,173$ -$ -$ -$
33 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,155,331$
33 Second 12.50% -$ -$ 1,515,014$ -$ -$
33 Third 12.50% -$ -$ -$ 1,513,660$ -$
34 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,154,016$
34 Second 12.50% -$ -$ 1,515,014$ -$ -$
34 Third 12.50% -$ -$ -$ -$ 1,512,345$
35 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,152,489$
35 Second 12.50% -$ -$ -$ 1,513,660$ -$
35 Third 12.50% -$ 1,512,173$ -$ -$ -$
36 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,155,331$
36 Second 12.50% -$ -$ -$ 1,513,660$ -$
36 Third 12.50% -$ -$ 1,515,014$ -$ -$
37 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,152,661$
37 Second 12.50% -$ -$ -$ 1,513,660$ -$
37 Third 12.50% -$ -$ -$ -$ 1,512,345$
38 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,151,174$
38 Second 12.50% -$ -$ -$ -$ 1,512,345$
38 Third 12.50% -$ 1,512,173$ -$ -$ -$
39 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,154,016$
39 Second 12.50% -$ -$ -$ -$ 1,512,345$
39 Third 12.50% -$ -$ 1,515,014$ -$ -$
40 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,152,661$
40 Second 12.50% -$ -$ -$ -$ 1,512,345$
40 Third 12.50% -$ -$ -$ 1,513,660$ -$
41 First payment 100% 12,168,875.00$ -$ -$ -$ -$ 12,168,875$
41 Second 0 -$ -$ -$ -$ -$
41 Third 0 -$ -$ -$ -$ -$
42 First payment 87.5% 10,647,766$ -$ -$ -$ -$ 12,159,939$
42 Second 12.5% -$ 1,512,173$ -$ -$ -$
42 Third 0.0% -$ -$ -$ -$ -$
43 First payment 87.5% 10,647,766$ -$ -$ -$ -$ 12,162,780$
43 Second 12.5% -$ -$ 1,515,014$ -$ -$
43 Third 0.0% -$ -$ -$ -$ -$
44 First payment 87.5% 10,647,766$ -$ -$ -$ -$ 12,161,425$
44 Second 12.5% -$ -$ -$ 1,513,660$ -$
44 Third 0.0% -$ -$ -$ -$ -$
45 First payment 87.5% 10,647,766$ -$ -$ -$ -$ 12,160,111$
45 Second 12.5% -$ -$ -$ -$ 1,512,345$
45 Third 0.0% -$ -$ -$ -$ -$
46 First payment 50.0% 6,084,438$ -$ -$ -$ -$ 12,133,131$
46 Second 50.0% -$ 6,048,693$ -$ -$ -$
46 Third 0.0% -$ -$ -$ -$ -$
47 First payment 50.0% 6,084,438$ -$ -$ -$ -$ 12,144,495$
47 Second 50.0% -$ -$ 6,060,058$ -$ -$
47 Third 0.0% -$ -$ -$ -$ -$
48 First payment 50.0% 6,084,438$ -$ -$ -$ -$ 12,139,077$
48 Second 50.0% -$ -$ -$ 6,054,639$ -$
48 Third 0.0% -$ -$ -$ -$ -$
49 First payment 50.0% 6,084,438$ -$ -$ -$ -$ 12,133,817$
49 Second 50.0% -$ -$ -$ -$ 6,049,380$
49 Third 0.0% -$ -$ -$ -$ -$
Payment
Scheme
T Payment Spot/Forward rates
Payment
Total
26. Appendix
26
Payment Scheme
Price Tag Starting Date Spot Rate Actual Payment Rate
AUD 16,750,000 06/02/2016 0.723 0.7265
Option 1
% to the total Payment 06/02/2016 09/01/2016 10/03/2016 11/01/2016 12/01/2016 Total Payment Effective Currency Rate % of Saving Amount of Saving
First payment 50.0% USD 6,084,437.50 USD 0 USD 0 USD 0 USD 0
Second 50.0% USD 0.00 USD 0 USD 0 USD 0 USD 6,048,693
Option 2
% to the total Payment 06/02/2016 09/01/2016 10/03/2016 11/01/2016 12/01/2016 Total Payment Effective Currency Rate % of Saving Amount of Saving
First payment 50.0% USD 6,084,437.50 USD 0 USD 0 USD 0 USD 0
Second 12.5% USD 0.00 USD 1,512,345 USD 0 USD 0 USD 0
Third 37.5% USD 0.00 USD 0 USD 0 USD 0 USD 4,536,520
Comparison Pay full on June 2ndNote: The price tag
multiplied by June 2nd
effective rate USD 12,168,875
USD 35,7440.29374%0.724366USD 12,133,131
0.29233% USD 35,573USD 12,133,302 0.72437625
FX Project Products
Amount Price in AUD
Team Victor R100 1500 750$
Timothy R200 2000 1,250$
Monique R500 2500 2,250$
Andy R1000 1000 7,500$
Cynthia Total Cost
Inputs Date Market rate Bank Fee Actual Payment Rate
USD/AUD 06/02/2016 0.723 35 bps 0.7265
Date Amount Total Cost
Option 1 06/02/2016 USD 6,084,437.50
12/01/2016 USD 6,048,693 12,133,131$
Option 2 06/02/2016 USD 6,084,437.50
09/01/2016 USD 1,512,345
12/01/2016 USD 4,536,520 12,133,302$
Difference 172$
