World First's chief economist, Jeremy Cook, is joined by Rick Roache, Head of Corporate Dealing and Structuring Teams at World First, to look back at Q2 of 2016 and look ahead to what we might be able to expect in Q3.

1. The Review: Q2 and what to
expect from Q3

2. Jeremy Cook
Chief Economist and
Head of Currency Strategy
Rick Roache
Head of Corporate Dealing
and Structuring

3. • Negotiations and Models
• Timelines and fallout
• EU and further referenda
• The Bank of England
• The Government
• The pound
So What Now?

4. • There is no precedent. Plans and the processes to leave the EU were only drawn up in the
Lisbon Treaty of 2009.
• The most important thing to remember is that the EU would act without the involvement of
the UK and that would limit the negotiating power of a newly independent UK.
• Laws would be repealed and reinstituted as well as draft laws changed. We would still be
subject to EU rules and regulations in the meantime however.
• Indeed, should a Brexited UK wish to keep access to the Single Market then budget
contributions would still have to be paid, free movement continued and the continued
supremacy of EU law over the single market upheld.

5. Source: Citibank

6. Source: Barclays

7. The fallout
Could lead to the end of the European Union
and trigger further referenda
Monetary
policy
Fiscal
policy
reaction
Sterling and
the euro

9. • First impetus would be lower in the UK although further QE spending more probable.
• BOE may let inflation run hot should deprecation boost CPI in stagflation push
• Delays Fed rate rise by 9/12 months at least – current thoughts sit at September
• Further policy easing globally triggers ‘currency war’ like conditions
• ECB to further cut into negative territory

10. • IFS paper warns of additional austerity for the British people larger than current
fiscal consolidation.
• Brexit campaigns talk of £8bn in savings but a small slowdown in growth can
easily eat up £8bn
• Have to think that Osborne wouldn’t still be in place in the event of a Brexit. Can
Labour take advantage?

11. • GBP cracks by 15-20% vs USD and other havens
• EUR strengthens initially but relative strength of economies and monetary policies a factor
• Commodity currencies to take a hit on a global trade
• Have to view the USD as the overall winner in this

12. • The answer depends on what kind of arrangement the UK came to with the EU.
• Germany will want to make clear that disrupting the EU does not come without costs. Even
if a deal were on offer, it is unlikely to come without a requirement for the free movement of
labour, as in the Swiss case.
• WTO tariffs: The EU protects agricultural markets strongly, for example. Exporters of dairy
products or meat might find themselves facing tariffs of 30 per cent or more - enough to
make exporting impossible for many companies. A lower sterling may help this however.
• Inward investment, both from EU countries, and from countries which see the UK as a
gateway to the EU markets and there is little incentive for a European firm to set up new
production facilities in the UK if they would then face barriers to selling back into Europe.

13. Q3 2016 Q4 2016 Q1 2017 Q2 2017
GBPUSD 1.25 1.22 1.20 1.25
EURUSD 1.06 1.04 1.00 0.98
EURGBP 0.85 0.85 0.83 0.78
GBPEUR 1.18 1.17 1.20 1.28
GBPJPY 126.25 119.56 120.00 131.25
USDJPY 101.00 98.00 100.00 105.00
AUDUSD 0.70 0.70 0.68 0.66
NZDUSD 0.64 0.62 0.60 0.58
GBPAUD 1.79 1.74 1.76 1.89
GBPNZD 1.95 1.97 2.00 2.16
These comments are the views and opinions of the author and should not be construed as advice. You should act
using your own information and judgment.
Whilst information has been obtained from and is based upon multiple sources the author believes to be reliable, we
do not guarantee its accuracy and it may be incomplete or condensed.
All opinions and estimates constitute the author’s own judgment as of the date of the briefing and are subject to
change without notice.

14. Foreign exchange risk arises
when your company is exposed to
a financial transaction in any form
that is denominated in another
currency. Your company can be
exposed to this risk through a
number of channels – most
notably:
Risks
Transactional Translational Credit Risk Liquidity Risk
Forecasted FX
Exposures
Balance Sheet
Adjustments
Default Risk Liquidity Events
Accounts Payable
Foreign assets /
liabilities
Concentration Risk Margin Calls
Accounts Receivable Tax obligations Counterparty Risk
Capital Expenditure Foreign CCY loans
Significant Company
Purchases/M&A
What are the risks my company could be exposed to?

15. How to visualise your risk-return trade off
-5.00% -4.00% -3.00% -2.00% -1.00% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00%
Probability
Returns above/below 0%
DISTRIBUTION OF RETURNS
Probability distribution is one of the most
effective ways to visualise the dispersion of
your returns and your inherent risk.
Depending on your portfolio of products,
your dispersion, or distribution, of risk will
differ. The probability distribution curves
pictured show normal distribution. That is,
the positive and negative risks to your
portfolio are symmetrical and are equally as
probable.
Having a riskier portfolio will increase the
probability that your portfolio will result in
excess returns/losses, and decrease the
extent to which your returns are dispersed
around zero – as shown by the green curve.
More Risky More RiskyRisk Neutral
LESS RISKY
PORTFOLIO
MORE RISKY
PORTFOLIO

16. 100% Certainty
0% Flexibility
Portfolio of spot, forward
and options contracts
Protection with potential upside
Protection of a portion of the exposure
Forward contracts Spot deals
Fully Hedged Wholly unhedged
What are your Hedging objectives?
0% Certainty
100% Flexibility

17. 0.675
0.725
0.775
0.825
0.875
2012 2013 2013 2014 2014 2015 2016
A static hedging program can be used to protect a budget rate by purchasing forward contracts to cover your budget rate for a chosen period.
Upon a new hedging period, a new set of forward contracts are purchased to cover the following hedging period.
Static Hedging
Static Hedging Program
EUR/GBP
Disadvantages
• You do not benefit if rates move in
your favour
• As with a forward contract, you
may have to pay an initial deposit
• If rates move against you, you may
need to pay a margin call in order
to keep the position in place
Advantages
• Allows you to forecast transactable
future FX rates
1Month: 2 3 4 5 6 7 8 9 10 11 12
Source: ECB Daily fix, World First DataNote: the above is an indication of past performance and is not a reliable indicator of future results.

18. Time Horizon: Long, Medium, Short term view
Selecting the length of your program is critical to ensuring you meet your hedging objectives. Whether your business
can forecast your exposure 3 months or 3 years in advance – we’ve got you covered.
How far forward do you require cover?
0 Months 6 Months 12 Months 18 Months 24 Months 30 Months 36 Months
Length of Hedging Program:

19. HEDGING PRODUCTS
INVESTMENTS AND FOREIGN EXCHANGE CAN GO UP AS WELL AS DOWN AND INVOLVE THE
RISK OF LOSS. PAST PERFORMANCE WILL NOT NECESSARILY BE REPEATED IN THE FUTURE.

20. For many corporates, hedging will have one purpose – to achieve a pre-determined budget rate. Your budget rate will be the
rate you use to forecast your future international transactions (whether you’re paying suppliers, issuing invoices or exporting
your produce) and will inform your company-wide forecasts on performance.
Your attitude and flexibility toward this budget rate will inform your hedging objectives:
Your Product Portfolio
Forward Contracts and Variations
Will allow you to fix a rate for up to 3 years, based on
the interbank exchange rate at the time of booking –
this gives you a guaranteed rate at which to transfer
up to the point at which the contract expires.
Spot Contracts
Allows you to fulfil your payment requirements with
minimal notice. You’ll know exactly how much you’re
paying up front, and how much the recipient bank
account is due to receive.
Protection with Potential Upside
Like a forward contract, a protection option will provide you
with a guaranteed rate at which to conduct your future
transactions. Unlike a forward contract, if the rates improve
in your favour, you can use the improved spot rate at which
to transact.

21. A forward contract will allow you to fix
a rate for up to 3 years, based on the
interbank exchange rate at the time of
booking – this gives you a guaranteed
rate at which to transfer up to the point
at which the contract expires.
Forward contracts and variations
Your forward rate will always be based on
interbank rate on the day of purchase. The
difference between the interbank rate and your
forward rate is a function of the interest rates
applicable to each currency, the tenor of the
forward contract you wish to buy and the spread
World First charges for the transaction.
Disadvantages
• You may be required to pay an initial deposit
• If rates move against you, you may need to
pay a margin call in order to keep the
position in place
• Lowest level of flexibility
• You do not benefit if rates move in your
favour
Advantages
• Protects your currency exposure from future
adverse currency movements

22. Like a forward contract, a protection option will
provide you with a guaranteed rate at which to
conduct your future transactions. Unlike a forward
contract, if the rates improve in your favour, you can
use the improved spot rate at which to transact. You
may have to pay a premium upfront for the product -
this premium may give you the right rather than the
obligation to buy at this worst case rate.
Disadvantages
• Upfront premium (cost) that you may have to
factor into your overall gains
• Beneficial rate moves limited by the premium paid
• If rates move against you, you may need to pay a
margin call in order to keep the position in place
Advantages
• You get all the benefits of a forward contract
• Guaranteed worst case rate
• You may benefit if the rate moves in your favour
Protection with Potential Upside

23. Advantages
• You are protected at a rate of 1.2950.
• All the benefits of remaining unhedged - you benefit
100% if the rate moves higher to 1.3800.
• Should spot on expiry be between 1.2950 and 1.2300,
having never traded at or below 1.2300 during the
window period, your worst case rate of 1.2950 is
boosted as follows: for every basis point spot is below
1.2950 but above 1.2300, your protection rate of 1.2950
increases by the same difference.
• Zero premium.
Scenarios on expiry
This structure gives you a protection rate to buy USD at 1.2950 on the settlement
date.
If the spot rate is above 1.2950 on expiry, you can choose not to exercise the
protection option and instead buy USD in the spot market.
However, if spot trades at or above 1.3800 during the window period, you are
obligated to buy the notional amount of USD at 1.2950.
Should spot on expiry be between 1.2950 and 1.2300, having never traded at or
below 1.2300 during the window period, your worst case rate of 1.2950 is
boosted by the basis point difference between the spot rate and 1.2950.
Disadvantages
• If the spot rate trades at or above 1.3800 during the
window period, you are knocked in to a rate of 1.2950
and are obligated to buy the notional amount of USD.
• Should spot trade at or below 1.2300 during the window
period, the opportunity to achieve a boosted rate no
longer exists.
Windowed Convertible Forward
1.27
1.28
1.29
1.30
1.31
1.32
1.33
1.34
1.35
1.36
1.37
1.38
1.39
1.40
1.41
HedgeRate
Spot rate at expiry
Forward Rate Hedge Rate

24. Advantages
• You are protected at the strike rate of 1.2400.
• You benefit 75% if the rate moves lower up to 1.1400.
• Should the barrier rate of 1.1400 be triggered, you
benefit 25% from any upward movement (purple line)
Scenarios on expiry
If the spot rate is above 1.2400 on expiry, you benefit from the protection rate of
the trade and have the right to sell USD at 1.2400 on the settlement date.
If the spot rate is lower than 1.2400 on the expiry date, you are obligated to sell
25% of the USD notional amount at 1.2400 and you can sell the remaining
notional at the prevailing spot rate on the expiry date.
However, if spot trades at or below 1.1400 during the window period, you are
obligated to sell 75% of the notional amount of USD at 1.2400 and you can sell
the remaining notional at the prevailing spot rate on the expiry date.
Disadvantages
• If the spot rate is between 1.2400 and 1.1400 on expiry,
having never traded at or below 1.1400 during the
window period, you are obligated to sell 25% of the
notional amount of USD at 1.2400.
• If the spot rate trades at or below 1.1400 during the
window period, you are obligated to sell 75% of the
notional amount of USD at 1.2400.
Ratio Forward
1.14
1.15
1.16
1.17
1.18
1.19
1.20
1.21
1.22
1.23
1.24
1.25
1.26
1.27
1.28
HedgeRate
Spot rate at expiry
Forward Rate Hedge Rate

25. Questions

26. • In this document World First may comment on the potential political outcome of the UK referendum on
EU membership. World First is not taking a political position and this document and the information and
opinion contained herein are not intended to promote or procure, or otherwise be in connection with
promoting or procuring, a particular outcome from the question asked within the UK referendum.
• These comments are the views and opinions of the author and should not be construed as advice. You
should act using your own information and judgment.
• Whilst information has been obtained from and is based upon multiple sources the author believes to
be reliable, we do not guarantee its accuracy and it may be incomplete or condensed.
• All opinions and estimates constitute the author’s own judgment as of the date of the briefing and are
subject to change without notice.
• Any rates given are ‘interbank’ i.e. for amounts of £5million or more thus are not indicative of the rates
offered by World First.
Disclaimers