Upload
maurice-miller
View
226
Download
0
Tags:
Embed Size (px)
Citation preview
Treasury Management EssentialsSponsored by:
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
FOREIGN EXCHANGE STRATEGIES TO HELP YOUR BUSINESS – ARE YOU READY TO GO GLOBAL?
Tom BeubeVice PresidentInternational ServicesWintrust Commercial [email protected]
Sarah E. Grooms, CTPVice PresidentTreasury ManagementTown Bank/[email protected]
2Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Who in the room has thought or said the following:
“I don’t have foreign currency exposure – we price everything in U.S. dollars.”
F IRST TH INGS F IRST… A QU IZ :
3Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
What we’ll cover today:
• Pro’s and Con’s of Hedging• Market Liquidity
• Why USD Is Not Always Best
• Reasons people do or do not hedge
• Foreign Exchange/Currency Hedging Tools
• Cross-Border Trade Tools
• Questions
AGENDA
4Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• Quiz answer: False!• But many believe it to be true
• More and more companies going global regardless of sales size
• Average daily turnover of global FX spot transactions reached $1.5 trillion in 2010
• Pricing in dollars does not mean there is no currency risk
• Collection and Payment Exposure
WHY U .S . DOLL AR IS NOT ALWAYS BEST
5Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
MARKET VOL AT IL ITY
6Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
MARKET VOL AT IL ITY
7Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• Currency markets are extremely liquid and transparent
• London and New York are most prominent centers of activity
• U.S. Dollar is the most liquid, followed by the Euro
• Most currencies trade with a standard two day settlement
• Majority of countries have floating exchange rates
MARKET L IQU ID ITY
8Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
WHY DON’T YOU WANT TO HEDGE?
We don't do enough foreign business
Perceived hassle outweighs benefits
Have not ever considered it
Have considered; don't know benefits
Aware of benefits; don't know how to
manage risks
I thought this was just for really huge
companies
0%
5%
10%
15%
20%
25%
30%
35%
40%
36%
30%
26%
15%14%
4%
Dec 2010 AMEX FX International Payments Trade Tracker Survey
9Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Potential Benefits
• Cash Flow Predictability
• Budgeted Forecast
• Satisfies Risk Aversion
• Concentrated Risk(s)
• Margin Preservation
Potential Detractors
• Procrastination Hurts
• Accounting Concerns
• Long Run “Immateriality”
• Too Confusing
• Lack of Hedging Framework
PROS VS . CONS OF TRANS ACT IONAL HEDGING
Dec 2010 AMEX FX International Payments Trade Tracker Survey
10Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• Known amount being received by the beneficiary bank
• Beneficiary usually receives funds more quickly
• What this means for you: Better Pricing Terms!
WHY YOUR FORE IGN CUSTOMERS M IGHT LOVE IT
Treasury Management Essentials sponsored by Wintrust Commercial Banking
Spot vs. forward currency hedging
SPOT VS . FORWARD CURRENCY HEDGING
12Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• Typical FX Transactions • Sending payments to a supplier
• Receiving payments from buyers
• Managing currency risk
• FX Products of Choice • Spot Transaction
• Fixed Date Forward
• Window Forward
TYP ICAL FX TRANS ACT IONS & PRODUCTS OF CHOICE
13Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• Spot transaction: • Foreign currency trade for 1– 2 day settlement
• Fixed date forward: • Foreign currency trade, locking in a specific conversion rate for
settlement in the future • Maturities up to one year
• Notional amounts can be specified
• Window forward: • Foreign currency trade, locking in a specific conversion rate for
settlement to occur over a “period of time” in the future.
FX PRODUCT TOOLK IT
14Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• Contract of buying or selling the currency for settlement (payment and delivery) on the spot date (normally two business days after the trade date)
• Funds are typically wired out same-day for settlement within two business days (time zones, etc. – exception: USD/CAD)
W H AT I S A S P O T T RA N S A C T I O N ?( A L S O C A L L E D S P O T C O N T RA C T , S P O T T RA N S A C T I O N , F X S P O T )
15Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Great For:
• One-time transaction
• Wildly varying amounts going to same vendor
• What if I have a long-term, multiple-shipment contract to hedge?
WHEN WOULD I USE A SPOT?
16Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• Priced at a premium or discount off the current spot rate to account for interest rate differentials in the home countries of the currency pair
• Eliminates currency risk
• Customized to the needs of the individual client
WHAT IS A FORWARD CONTRACT?
A foreign exchange forward contract is a contractual agreement between two counterparties to exchange a fixed amount of one currency for a fixed amount of another currency on a specific date(s) in the future. The relationship between the two currency amounts is determined by the exchange rate set on the day the contract is entered into (trade date). The date on which the actual exchange takes place (settlement) is the value date.
17Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• ABC Company is expecting to receive a payment in CAD on March1, 2012
• Payment amount C$ 100,000
• Current market rates:• Spot rate 1.0065
• Forward points .0002 (’2 points’)
• All-in rate 1.0067
FORWARD EXAMPLE
Forward Points: Compensation for the interest rate differential in the home countries (U.S. vs. Canada) of the currencies. If the Canadian interest rates are higher than those in the U.S., the person holding the USD should be compensated by the person holding the CAD.
18Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• Cash Flow
• No cash flow impact
• Cash Flow
• - C$ 100,000
• + $99,334.46
FORWARD CASH FLOWS
• February 10, 2012 (trade date)
• ABC Company enters into a contract today to sell
• C$100,000 for value March 1, 2012 at a rate of 1.0067
• March 1, 2012 (value date)
• ABC Company delivers CAD
• ABC Company account credited
• US dollars C$100,000 @ 1.0067
Note: The transaction is settled at the forward rate, which is equal to the spot rate +/- the forward points. In this case, the forward rate is 1.0065 + .0002 = 1.0067
19Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• Window Option (also known as a Window Forward)
• Allows a company to draw upon the forward contract, partial or in whole, within a specific timeframe no longer than a 1 year window
• Any balance may be “rolled over “ into a new contract or liquidated at prevailing market rates
• Enables importers/exporters to adjust for potential delays in receipts or payments
WINDOW OPT ION
20Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• The company is on the hook. This is insurance, not speculation. Forwards, not Futures.
• Also, there is a credit risk component.
A COUPLE WORDS OF CAUT ION…
Treasury Management Essentials sponsored by Wintrust Commercial Banking
FORE IGN TRADE TOOLS
22Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• Trade Finance:• Trade Letters of Credit
• Standby Letters of credit
• Bankers Acceptance Financing
• Documentary Collections
WHAT IS “TRADE F INANCE”?
23Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• Trade / Commercial• Import or Export
• Standby• Performance
• Financial
TYPES OF LETTERS OF CRED IT?
24Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• Trade / Commercial LC• This LC is expected to be drawn on
• Acts as the means for payment and exchange of title documents
• Generally used for cross border movement of goods
• Considered lower risk than a Standby as it is self liquidating and secured by the underlying goods
WHAT IS THE D IFFERENCE?
25Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• Standby LC• Acts as security in the event something goes wrong
• Covering leasing payments, performance under a contract, non payment of invoices, bid on a project, etc.
• Higher risk than a commercial LC• Often open for a year or more
• Drawn on when our borrower has failed to perform
WHAT IS THE D IFFERENCE?
26Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
To the Importer:
• Documentary evidence that the ordered goods have been shipped on time
• Assurance that necessary clearance documents will be provided
• Payment deferred until goods are shipped and documents presented
WHAT ARE THE ADVANTAGES OF A TRADE LETTER OF CRED IT?
27Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
To the Exporter:
• Payment protection
• Reliance on issuing bank’s credit rather than buyer’s
• Rapid, local source of repayment, if payable at a U.S. bank
WHAT ARE THE ADVANTAGES OF A TRADE LETTER OF CRED IT?
28Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
To the Beneficiary:
• Easy access to compensation in the event the applicant defaults or fails to perform
• Reliance on issuing bank’s credit rather than Applicant
• Simple requirements to draw
WHAT ARE THE ADVANTAGES OF A STANDBY LETTER OF CRED IT?
29Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
To the Applicant:
• Eliminates the need to provide cash security
• Beneficiary must present a draw request that can be used in court if the drawing is unwarranted
• Can be used to facilitate business on an ongoing basis with one letter of credit
WHAT ARE THE ADVANTAGES OF A STANDBY LETTER OF CRED IT?
30Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
WHAT IS A DOCUMENTARY COLLECT ION?
A Documentary collection is the collection by a bank of funds due from a buyer against the delivery of documents.
The bank, acting as agent for the seller (exporter), presents documents to the buyer (importer) through that party's bank and in exchange receives payment of the amount owed, or obtains acceptance of a time draft for payment at a future date.
The liability of the bank under a documentary collection is primarily restricted to following the seller's instructions in forwarding and releasing documents against payment or acceptance.
31Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• Unlike a letter of credit, the bank does not assume any liability to pay if the buyer does not want or is unable to pay
• Compared to open account sales, the documentary collection offers more security to the seller, but less than a letter of credit
H O W I S D O C U M E N TA RY C O L L E C T I O N D I F F E R E N T F R O M A N L / C O R O P E N A C C O U N T ?
32Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• Simple and inexpensive handling compared to letters of credit
• Often faster receipt of payment than open account terms
• Seller retains title to the goods until payment or acceptance is made
WHAT ARE THE ADVANTAGES OF A DOCUMENTARY COLLECT ION?
33Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• If the buyer refuses or is unable to pay, the seller has three options, which could be expensive:
• Find another buyer
• Pay for return transportation
• Abandon the merchandise
WHAT ARE THE D IS ADVANTAGES OF DOCUMENTARY COLLECT ION?
34Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
• Documents against Payment (D/P) also known as "Sight Draft" or "Cash against Documents” (CAD). The buyer must pay before the collecting bank releases the title documents.
• Documents against Acceptance (D/A). The buyer accepts a time draft, promising to pay for the goods at a future date. After acceptance, the title documents are released to the buyer.
WHAT TYPES OF DOCUMENTARY COLLECT IONS ARE THERE?
35Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
1. The buyer (importer) and seller (exporter) agree on the terms of sale, shipping dates, etc., and that payment will be made on a documentary collection basis.
2. The exporter arranges for the delivery of goods to the port/airport of departure.
3. Export documents and instructions are delivered to the exporter's bank by the exporter.
4. Following the instructions of the exporter, the bank processes the documents and forwards them to the buyer's bank.
5. The buyer's bank, on receipt of documents, contacts the buyer and requests payment or acceptance of the trade draft.
6. After payment or acceptance of the draft, documents are released to the buyer, who utilizes them to pick up the merchandise.
7. The buyer's bank remits funds to the seller's bank or advises that the draft has been accepted.
8. On receipt of good funds, seller's bank credits the account of the exporter.
WHAT ARE THE STEPS IN DOCUMENTARY COLLECT ION?
36Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
1. The contract is made between the importer and the exporter 2. The exporter sends the documents to his bank with instructions for delivery 3. The exporter's bank sends the documents to the importer's bank with instructions
that the documents can be handed over against payment or acceptance of a draft 4. The importer's bank hands the documents over to the importer when the conditions
have been fulfilled5. The exporter receives payment
THE COLLECT ION PROCESS
37Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
WHAT I F SH IPMENT IS BY A IR FRE IGHT?
An Air Waybill (AWB) is a straight consignment; it is not negotiable. The buyer does not need the AWB to pick up the goods. In other words, the buyer can obtain the merchandise without paying for it.
To avoid this possibility, when shipping by air, the AWB should always be consigned to the buyer's bank. This prevents release of the merchandise until such time as the buyer's bank issues an Air Release to the carrier. This is done only after the buyer has made payment or accepted the draft.
Treasury Management Essentials sponsored by Wintrust Commercial Banking
Q U E S T I O N A N D A N S W E R T I M E
T H A N K Y O U F O R AT T E N D I N G !
39Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
TYP ICAL CURRENC IES TRADEDC U R R E N C I E S W E C A N T R A D E
40Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
TOM BEUBE
Tom Beube is Director of International Services at Wintrust Financial Corp. Tom joined Wintrust in November of 2010 after spending 17 years with LaSalle Bank, ABN AMRO Bank and Bank of America. He began his banking career with The First National Bank of Chicago. During his time with ABN AMRO he spent four years working in Asia. Three of those years were in Hong Kong and one in Shanghai where he worked with multinational clients doing business in China, as well as calling on Financial Institutions in the Asia Pacific region.
Tom is a graduate of the University of Iowa and currently resides in the Chicago area with his wife and two children.
41Treasury Management Essentials sponsored by Wintrust Commercial Banking
Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.
Sarah E. Grooms, CTP is a Vice President at Town Bank and has been with the bank for eleven years. Sarah joined the staff of Town Bank in May of 2001. Sarah graduated from Carroll University with a Bachelors Degree in Business-Finance. In 2005, Sarah completed the WBA’s Graduate School of Banking at UW-Madison, and has additionally earned her Certified Treasury Professional (CTP) designation in order to best assist clients. She is currently working on her Masters of Science in Applied Economics at Marquette University with a specialization in International Business.
Sarah has spoken previously for TMANE (Boston), Windy City Summit (Chicago), BizTech (Milwaukee), and the InBusiness Series (Madison) in addition to area colleges, as well as appearing on “InBusiness Radio with Jody and Joan” and Fox6 News - Milwaukee. She is a 2012 Forty Under 40 recipient (Business Journal, Milwaukee). She is a member of the AFP and WTMA and serves on the boards of the LIFE Charter School, Tempo-Waukesha and The Women’s Center. She currently resides near Milwaukee, WI with her husband and son.
S ARAH E . GROOMS, CTP