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Managing Foreign Exchange RiskFinancial Planning for ExportersJanuary 25, 2012 | Going Global: Partnering for Internationa...
Notice to RecipientConfidential    In certain regions or jurisdictions this disclaimer may not apply. You must consult wit...
Why are we here?“Going Global” has tractionInternational Outlook Overall, 68% of U.S. companies surveyed have some form o...
Foreign Currency Markets   Arguably, global currency markets are the world‟s largest financial market.    USD, bn        ...
FX Market Volatility Increased business, higher volumes, and more participants leads to currency volatility.          EUR...
Global Trends and Best Practices6
Trends impacting global companies             Globalisation             – Treasury operating models are changing from loc...
Transacting outside of the USD8
Why pay in the functional currency rather than in USD?   Lower Costs, Buying Cheaper       International suppliers often...
Why price products in the functional currency of the buyer ratherthan USD?    Increases Competitiveness of Pricing and Pr...
Managing foreign currency exposure11
How do I hedge a foreign currency payable or receivable? Hedging allows a company to lock in a pre-determined rate for a ...
When is a foreign currency account appropriate? Ideal solution:          Buying and Selling product in the same currency...
Documents required to open a foreign currency account abroad Certificate of Incorporation or Foreign equivalent Bylaws o...
Operating on a global platformSimplify Cross-Border Payments with a Fully Integrated Treasury Platform •   Automate and ga...
Closing remarks With more and more business being transacted overseas, a company‟s success depends on efficiently operati...
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Managing foreign exchange risk wes seegar, bank of america - 25 january 2012

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Managing foreign exchange risk wes seegar, bank of america - 25 january 2012

  1. 1. Managing Foreign Exchange RiskFinancial Planning for ExportersJanuary 25, 2012 | Going Global: Partnering for International GrowthWes Seeger(980) 386-1899wes.seeger@baml.com
  2. 2. Notice to RecipientConfidential In certain regions or jurisdictions this disclaimer may not apply. You must consult with your regional Origination Counsel to ascertain whether this disclaimer is applicable.“Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities areperformed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performedglobally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill LynchProfessional Clearing Corp., all of which are registered broker-dealers and members of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. Investment products offered by InvestmentBanking Affiliates: Are Not FDIC Insured * May Lose Value * Are Not Bank Guaranteed.These materials have been prepared by one or more subsidiaries of Bank of America Corporation for the client or potential client to whom such materials are directly addressed and delivered (the “Company”) inconnection with an actual or potential mandate or engagement and may not be used or relied upon for any purpose other than as specifically contemplated by a written agreement with us. These materials arebased on information provided by or on behalf of the Company and/or other potential transaction participants, from public sources or otherwise reviewed by us. We assume no responsibility for independentinvestigation or verification of such information (including, without limitation, data from third party suppliers) and have relied on such information being complete and accurate in all material respects. To the extentsuch information includes estimates and forecasts of future financial performance prepared by or reviewed with the managements of the Company and/or other potential transaction participants or obtained frompublic sources, we have assumed that such estimates and forecasts have been reasonably prepared on bases reflecting the best currently available estimates and judgments of such managements (or, withrespect to estimates and forecasts obtained from public sources, represent reasonable estimates). No representation or warranty, express or implied, is made as to the accuracy or completeness of suchinformation and nothing contained herein is, or shall be relied upon as, a representation, whether as to the past, the present or the future. These materials were designed for use by specific persons familiar withthe business and affairs of the Company and are being furnished and should be considered only in connection with other information, oral or written, being provided by us in connection herewith. These materialsare not intended to provide the sole basis for evaluating, and should not be considered a recommendation with respect to, any transaction or other matter. These materials do not constitute an offer or solicitationto sell or purchase any securities and are not a commitment by Bank of America Corporation or any of its affiliates to provide or arrange any financing for any transaction or to purchase any security in connectiontherewith. These materials are for discussion purposes only and are subject to our review and assessment from a legal, compliance, accounting policy and risk perspective, as appropriate, following ourdiscussion with the Company. We assume no obligation to update or otherwise revise these materials. These materials have not been prepared with a view toward public disclosure under applicable securitieslaws or otherwise, are intended for the benefit and use of the Company, and may not be reproduced, disseminated, quoted or referred to, in whole or in part, without our prior written consent. These materialsmay not reflect information known to other professionals in other business areas of Bank of America Corporation and its affiliates.Bank of America Corporation and its affiliates (collectively, the “BAC Group”) comprise a full service securities firm and commercial bank engaged in securities, commodities and derivatives trading, foreignexchange and other brokerage activities, and principal investing as well as providing investment, corporate and private banking, asset and investment management, financing and strategic advisory services andother commercial services and products to a wide range of corporations, governments and individuals, domestically and offshore, from which conflicting interests or duties, or a perception thereof, may arise. Inthe ordinary course of these activities, parts of the BAC Group at any time may invest on a principal basis or manage funds that invest, make or hold long or short positions, finance positions or trade or otherwiseeffect transactions, for their own accounts or the accounts of customers, in debt, equity or other securities or financial instruments (including derivatives, bank loans or other obligations) of the Company, potentialcounterparties or any other company that may be involved in a transaction. Products and services that may be referenced in the accompanying materials may be provided through one or more affiliates of Bankof America Corporation. We have adopted policies and guidelines designed to preserve the independence of our research analysts. These policies prohibit employees from offering research coverage, afavorable research rating or a specific price target or offering to change a research rating or price target as consideration for or an inducement to obtain business or other compensation. We are required toobtain, verify and record certain information that identifies the Company, which information includes the name and address of the Company and other information that will allow us to identify the Company inaccordance, as applicable, with the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) and such other laws, rules and regulations as applicable within and outside the United States.We do not provide legal, compliance, tax or accounting advice. Accordingly, any statements contained herein as to tax matters were neither written nor intended by us to be used and cannot beused by any taxpayer for the purpose of avoiding tax penalties that may be imposed on such taxpayer. If any person uses or refers to any such tax statement in promoting, marketing orrecommending a partnership or other entity, investment plan or arrangement to any taxpayer, then the statement expressed herein is being delivered to support the promotion or marketing of thetransaction or matter addressed and the recipient should seek advice based on its particular circumstances from an independent tax advisor. Notwithstanding anything that may appear herein orin other materials to the contrary, the Company shall be permitted to disclose the tax treatment and tax structure of a transaction (including any materials, opinions or analyses relating to such taxtreatment or tax structure, but without disclosure of identifying information or, except to the extent relating to such tax structure or tax treatment, any nonpublic commercial or financialinformation) on and after the earliest to occur of the date of (i) public announcement of discussions relating to such transaction, (ii) public announcement of such transaction or (iii) execution of adefinitive agreement (with or without conditions) to enter into such transaction; provided, however, that if such transaction is not consummated for any reason, the provisions of this sentenceshall cease to apply. Copyright 2011 Bank of America Corporation.2
  3. 3. Why are we here?“Going Global” has tractionInternational Outlook Overall, 68% of U.S. companies surveyed have some form of foreign market involvement (85% of manufacturers and 51% of services and commodities companies). As a whole, 56% buy from foreign markets, 49% sell to foreign markets and 31% have operations in foreign countries. USD billions US Corportate Profits 2,000 50% 1,800 45% 1,600 40% 1,400 35% 1,200 30% 1,000 25% 800 20% 600 15% 400 10% 200 5% 0 0% 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Corporate Prof its *Source: U.S. Department of Commerce, BEA Receipts f rom Rest of World Ratio3
  4. 4. Foreign Currency Markets Arguably, global currency markets are the world‟s largest financial market. USD, bn Average Global Daily Turnover USD bn Average US Daily Turnover $4,500 900 $4,000 800 $3,500 700 $3,000 600 $2,500 500 $2,000 400 $1,500 300 $1,000 200 100 $500 0 $- O-04 A-05 O-05 A-06 O-06 A-07 O-07 A-08 O-08 A-09 O-09 A-10 O-10 1989 1992 1995 1998 2001 2004 2007 2010 Source: BIS, 2010 Source: FX Committee, Volume Surveys, October 2004 – October 2010. 2010 average daily global turnover in all FX transactions (spot, forwards, swaps and options) estimated at $4.0 trillion.  Up 20% compared to 2007 (18% at constant exchange rates).  Daily turnover roughly equivalent to annual world trade in goods and services. US market data shows a collapse in volumes in early 2009, followed by a recovery to late 2008 levels. The vast majority of transactions take place in OTC market. Market participants include multinational corporations, investors, financial institutions and central banks; their heterogeneous views and objectives contribute to currency volatility.4
  5. 5. FX Market Volatility Increased business, higher volumes, and more participants leads to currency volatility. EUR/USD – 2 Year Historical USD/JPY – 2 Year Historical 1.65 115 110 1.55 105 1.45 100 95 1.35 90 85 1.25 80 1.15 75 Jan-08 Oct-08 Jan-09 Oct-09 Jan-10 Oct-10 Jan-11 Oct-11 Jan-12 Apr-08 Jul-08 Apr-09 Jul-09 Apr-10 Jul-10 Apr-11 Jul-11 Jan-08 Oct-08 Jan-09 Oct-09 Jan-10 Oct-10 Jan-11 Oct-11 Jan-12 Apr-08 Jul-08 Apr-09 Jul-09 Apr-10 Jul-10 Apr-11 Jul-115
  6. 6. Global Trends and Best Practices6
  7. 7. Trends impacting global companies  Globalisation – Treasury operating models are changing from local to regional to global, with a spotlight on increasing control. Rationalization and consolidation of providers is a key focus.  Global banking technology – Increased automation, outsourcing and centralisation of cash and liquidity management. Increased efficiency and doing more with less.  Risk management – Cash is King – the lifeblood of our clients‟ organisations. Who has access to what?  Market forces – „credit crunch‟ – Increased need to gain control over internal liquidity, decrease dependency on external funding and manage risk. 7
  8. 8. Transacting outside of the USD8
  9. 9. Why pay in the functional currency rather than in USD? Lower Costs, Buying Cheaper  International suppliers often increase their prices in USD to protect themselves from currency rate movement between billing and payment date  Since the supplier is taking the currency risk from invoice date to payment date, the supplier often “charges” the buyer for the ability to pay in USD versus the local currency  Simply paying in the functional currency improves price transparency and ensures that a wholesale exchange rate is being applied to all transactions Achieve Better Accounting  Paying in the functional currency would allow a company to know the exact amount of the foreign currency paid to supplier Guarantee Promptness  The functional currency of the supplier will typically post to an account faster as the foreign bank does not have to stop the USD payment for conversion to the local currency Control / Transparency  Sending the functional currency eliminates over/underfunding an invoice  Maintain certainty over the exchange rate being applied to funds and the amount of foreign currency being received by the beneficiary  Retain the ability to manage the Company‟s exposure to fluctuations in the exchange rate and make the decision to hedge9
  10. 10. Why price products in the functional currency of the buyer ratherthan USD? Increases Competitiveness of Pricing and Product  Pricing in the functional currency allows the product to compete with similar products that are also priced in the functional currency  In times of USD strength, pricing in the functional currency is more attractive to the buyer Increases Potential Buyers  Products priced in the functional currency are more attractive to buyers unwilling or unable to take currency risk Increase Price / Margin  Ability to increase price or margin on products priced in the functional currency because the buyer is not taking the currency risk  Since the buyer is unable or willing to take the currency risk, they are often willing to pay more to avoid currency exposure10
  11. 11. Managing foreign currency exposure11
  12. 12. How do I hedge a foreign currency payable or receivable? Hedging allows a company to lock in a pre-determined rate for a future cash flow:  The most widely used hedging tool is a forward contract  A forward contract is a legally binding agreement to buy one currency and sell another, for settlement (value) on a specific date beyond spot, at a rate agreed upon today  No initial currency exchange, or payment of premium/fee, to initiate a forward contract  Effectively exchange uncertainty for a known certain outcome  Best suited when there is a desire to lock in current rate, perhaps because of known foreign currency remarket view or because risk management goal is to eliminate all surprises  Protect against “losses” if the currency moves against the underlying exposure  However, forwards forego any benefit, if currency moves in favor of the underlying  Forward contracts do require credit approval12
  13. 13. When is a foreign currency account appropriate? Ideal solution:  Buying and Selling product in the same currency  Maintains offices/employees overseas  International subsidiaries Foreign currency accounts provide robust treasury capabilities such as low value wire payment, cross border ACH, information reporting. Use of a foreign currency account, a company effectively protects itself from currency volatility for any amounts where the volumes of the receivables match the company‟s anticipated payable needs..Key Considerations: Opening a foreign currency account abroad- Transaction volumes, payments, receipts, payroll. Increase control over bank accounts, automation, minimize idle cash balances.13
  14. 14. Documents required to open a foreign currency account abroad Certificate of Incorporation or Foreign equivalent Bylaws or Foreign equivalent Board Resolution Drivers License or Passport copies Financial Institution agreements Country specific documents14
  15. 15. Operating on a global platformSimplify Cross-Border Payments with a Fully Integrated Treasury Platform • Automate and gain full control over your FX payments • Achieve convenience and efficiencies • Reduce risks and the potential for error • Lower costs • Centralize reporting • Leverage multiple payment channels • FX wire transfers • Cross-border ACH • Centrally printed drafts • Increase internal controls15
  16. 16. Closing remarks With more and more business being transacted overseas, a company‟s success depends on efficiently operating on a global scale. By thinking, acting and competing globally a company can ensure that it has the right tools and policies in place to accommodate international growth. In practice, this includes but is not limited to the following; – Transacting outside of the USD – Putting a policy in place for managing exchange rate risk when appropriate – Establishing an international platform that is both transparent, easy to use and can accommodate ongoing global growth – Consolidating and centralizing global decision making – Working with a truly global institution and leveraging its footprint and capabilities internationally• By having the right structure and tools in place, operating outside of the U.S. can be made easy.• There is not one perfect model for every company. Instead, there are many variations based on common underlying themes that can be structured to best fit a company‟s specific needs.16

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