APEC Symposium – Taipei, 16-17 August 2011 Enhancing SME Capacity of Managing the Risks Associated with Trade Liberalization APEC Symposium – Taipei, 16-17

APEC Symposium – Taipei, 16-17 August 2011APEC Symposium – Taipei, 16-17 August 2011

Enhancing SME Capacity of Managing the Enhancing SME Capacity of Managing the Risks Associated with Trade LiberalizationRisks Associated with Trade Liberalization

Workshop on Trade Liberalization and the

Associated Risks Faced by Domestic SMEs

John R. Rush

Principal Consultant

Oakbridge Limited

[email protected]

Relevant backgroundRelevant background

An advisor on foreign exchange risk management and expert witness in foreign exchange litigation

Almost 30 years presenting foreign exchange workshops internationally

Hundreds of workshops

Thousands of workshop attendees

Many workshop attendees part of a mix of SME exporters and importers across broad range of industries

COPYRIGHT © OAKBRIDGE LIMITED 2011

Trade liberalization engenders riskTrade liberalization engenders risk

New commercial opportunities?

New markets?

New counterparties?

New risks – commercial and financial?

New currency exposures?

New regulatory environments?


Focus on management of exchange rate riskFocus on management of exchange rate risk

In context of an SME managing its foreign exchange exposures, doing nothing is doing something

“Doing nothing” is tantamount to entering into, by default, the business of speculating on exchange rates

Speculating on exchange rates is a highly risky business

Contrary to popular mythology, banks really are risk averse entities and do not take large speculative foreign exchange positions


What often drives SME business decision-making when confronted by foreign exchange risk is…

FUDFUD


""FUDFUD" stands for:" stands for:

FFEAR

UUNCERTAINTY

DDOUBT

But there is good news…

FUD can be dispelled and…

the effects of fluctuating exchange rates be mitigated, or perhaps eliminated


New trade opportunities bring new currency New trade opportunities bring new currency risks?risks?

A strategically astute starting point for SMEs…

concentrate on core commercial business and…

do something about managing currency risks

If there is a desire to do so, currency risks may be totally eliminated

Effective commercial strategies are available

Range of financial instruments can be employed


Establishing a corporate foreign exchange risk Establishing a corporate foreign exchange risk management policymanagement policy

SME owner/s or Directors should adopt and implement a foreign exchange risk management policy BEFORE venturing into new trade markets

Know how to cope, in principle, with a potential foreign exchange problem before it occurs

Within the policy document, provide for limits, controls and ongoing oversight so as to avoid costly financial mismanagement and/or fraud



Will the SME be a foreign exchange risk taker or be risk averse?

If taking a risk, how much risk? Quantify the level of risk.

Specify authorised instruments in which dealing is permitted (eg spot, forwards, options, futures, swaps)

Limits must be placed on all dealing – and a dealer breaking a limit should be dismissed!



Separate personnel performing dealing function from those confirming and settling deals

Policy should mandate a periodic “mark to market” revaluation exercise

Periodically review policy. If current policy not suitable for current trade and market conditions, change the policy


Commercial negotiations in new marketsCommercial negotiations in new markets

An SME exposed to exchange rate risks could negotiate with its trade counterparty so as to…

Pay less for goods (if SME is an importer)

Charge higher prices (if SME is an exporter)

Invoice in home currency (if SME is an exporter) – and completely avoid dealing in foreign currency

All assuming the counterparty is in agreement at a “reasonable” price


The SME financial instruments tool kitThe SME financial instruments tool kit

Spot foreign exchange contracts

Forward foreign exchange contracts (both deliverable and non-deliverable)

Borrowing and investing in foreign currencies

Foreign exchange derivatives (eg currency options, foreign exchange futures, short and long term swaps)

Cross rates (or “third currency” deals)


Technical financial understanding and independent Technical financial understanding and independent adviceadvice

Understand all transactions

Must be technically competent personnel within SME who are not dealers – otherwise seek independent external advice

Be able to assess if the bank’s quoted price is “reasonable”

SME directors and senior executives should be competent to know “the right questions to ask” their in-house dealers and their bankers and…

…have sufficient competence to assess whether answers received reveal the whole truth


A note of caution for SMEsA note of caution for SMEs

Banks offering both “independent” transaction advice to SMEs and transaction pricing for the SME have an inherent conflict of interest

Banks generally not noted for the quality of the foreign exchange education provided to their SME clients


Know where the market is!Know where the market is!

The more exchange rates fluctuate, the more important it is to have access to good quality, real time market rates

Many good Web sites now offer accurate real time foreign exchange market rates for free

Being out of touch with the markets may lead to costly missed opportunities

But don’t obsessively watch rates move. Take care of the core commercial business!


SummarySummary

Foreign exchange risks can be controlled – but it requires:• a desire to do so• technical expertise• ongoing oversight of risky positions

Adopt a professional approach to managing foreign exchange risks…• cut losses quickly and let gains run - but have a “take profit”

level in place

The price of solvency is eternal vigilance!


Copyright © Oakbridge Limited 2011

The foregoing presentation is copyright. Except as permitted by applicable copyright legislation, no part of the foregoing

presentation may be reproduced or distributed in any form or by any means without the express written permission of the

copyright owner, Oakbridge Limited.

Email: [email protected]: www.oakbridgelimited.com

Documents

APEC Symposium – Taipei, 16-17 August 2011 Enhancing SME Capacity of Managing the Risks Associated with Trade Liberalization APEC Symposium – Taipei, 16-17