HSBC Bank USA, N.A.

Trade and Supply Chain

Trade & Supply Chain

Foreign Exchange and Risk
Management
May 2010
Major Risks Related to International Trade

· Political Risk
– War, civil disturbance, or revolution
– Expropriation
– Inconvertibility of local currency into dollars or other hard currency. (Transfer Risk)

· Commercial Risk/Business Risk

– Disputes between buyer and seller.
– Controlling title to goods pending payment.
– Customer illiquidity or insolvency
– Inability to finance company “investment” in export accounts receivable
– Control of quality of goods.
– Working capital tied up
– Increasing reliance on bank debt.

· Documentary Risk
· Interest Rate Risk
· Foreign Exchange Risk
– Foreign Exchange Risk noted as biggest barrier to trade growth over the next six months
by U.S. businesses, according to recent Trade Confidence Index
Foreign Exchange Market

· In today’s global market place, foreign exchange plays a significant role: 4

trillion U.S. dollars worth of currency is exchanged on a daily basis.
– -Payments
– -Investments cross-border

· Prices available 24 hours a day, 7 days a week.

· No formal exchange for currencies. Trading is done over the counter in an

interbank market and via brokers.

· In this highly dynamic environment, global presence, extensive footprint and

local knowledge are characteristics to look for in your trade bank.

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Who Uses Foreign Exchange?

· Importers/Exporters
– Importers pay in the foreign currency
– Exporters receive payment in foreign currency
· Multinational corporations
– Multinationals fund foreign subsidiaries and funds are repatriated back to
parent companies
· International investors
– International investors hedge interest payments with forwards
· Tour operators
– Tour operators book foreign travel in the local currency
· Schools
– Schools make and receive tuition payments in foreign currency

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Why Use Foreign Exchange?

· Competitive edge
– Exporters enhance their customer base by allowing customers to pay in their
local currency.
· Improve profit margin
– Build hedging cost into pricing.
· Negotiate better pricing
– Importers have the upper hand when they take the responsibility to pay a foreign
supplier in local currency.
· Reduce risk
– Diversifying your international supplier base reduces the risks associated with
doing business with a limited number of vendors, in a limited number of regions.

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How is Foreign Exchange Used?

· Use forward pricing to negotiate sales contracts

· Lock in forward pricing when sales contract is firm

· Match foreign exchange product to your particular trade cycle and predicted
cash flows

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Identifying Foreign Exchange Exposure

Understanding Foreign · A clear understanding of your foreign exchange exposure is necessary to assess
Exchange Exposures
risks. Exposures arise as a result of exchange rate volatility.

EUR/USD
1.60

1.50

1.40

1.30

1.20

1.10
USD/BRL
4.00
1.00

0.90 3.50

0.80
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 3.00

2.50

2.00

1.50
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

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Identifying Foreign Exchange Exposure

· The main sources of foreign exchange exposure:

– Paying for goods and services priced in a foreign currency, or
– Receiving foreign currency for goods or services provided.

· Exposures can also arise from:

– Competitors having a cost base and/or selling their products in a foreign currency
– Overseas manufacturing plants or subsidiaries
– Overseas subsidiaries' foreign currency borrowing or surplus cash balances

· Exposure can manifest itself in a number of different ways:

– decreased USD cash flows or margins,
– EPS or balance sheet volatility,
– overseas contract cancellations,
Developing a Strategy for Hedging & Risk Management

· Understanding a company’s foreign exchange exposures allows the

identification of the exposures as they occur, and an assessment of the potential
impact on a company.
· Companies can hedge these exposures to minimize the foreign exchange impact
on their financials, cash flows, margins, EPS, etc..
· There are four risk management alternatives available:
– Spot Transaction.
– Forward Transaction
– Purchasing Vanilla Options
– Structured Products (ex. Collars, Participating Forward, etc.)

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Developing a Strategy for Hedging & Risk Management

· Importance of an F/X policy

– Philosophy and process for managing cross-border exposure

· Cornerstones
– Cash management/online banking platform
– A view into F/X exposure
– Trade/Supply Chain techniques
– Manage payment risk
– Foreign exchange policy
– Manage exposure

· When to consider using foreign exchange techniques

– Frequency of foreign exchange trades/year
– 10-15/year
– Trade size – min. US$ 20,000 per transaction
What is the Bottom Line?

· Hedging can eliminate the uncertainty of the FX rate that will be used by a
company in the future.

· A Foreign Exchange Forward contract allows a company to pay or receive

foreign currency in the future at an exchange rate agreed upon today.

· By locking in the rate, a company can protect profits margins and eliminate
uncertainty of the value of cash flows.

· A company can know exactly how many U.S. dollars they will pay or receive in
the future, so they can better forecast their business’ cash flow cycle and plan
operations accordingly.

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HSBC Foreign Exchange

2008 Euromoney Poll · FX business operates out of our three main centers (New York, London and
HSBC is consistently ranked as Hong Kong)
one of the top banks in the world
in FX. HSBC ranked #2 for Most
Impressive Approach to FX , · Extensive geographic footprint (incorporating some 89 branches), and expertise
Who’s Best Where category in
EMEA and Asia & Australia. We
in many local markets give us an additional and unique insight into
were ranked within the top 3 in 26
of the other categories which
developments all over the globe
cements our overall ranking of
3rd for qualitative criteria.

Top 3:

GBP, HKD, CNY, Asian ccy’s,

Middle East ccy’s

Options Trading Strategies and The Americas * Europe * Asia *

new ideas · New York · London · Hong Kong

Best FX-linked products · Canada · France · Japan

· Brazil · Germany · Australia
Most innovative and original · Argentina · Russia · China
research and strategy
· Mexico · Turkey · Thailand
EM Research and strategy · Chile · Israel · India
· Bermuda · Dubai · Korea
Most Innovative Hedging Strategy
· Saudi Arabia · Singapore
Fwds: EM currencies, and both · South Africa
over and under 1yr

Research and Analytics on online

platforms Note: * Not exhaustive lists

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Disclaimer
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GUARANTEE ITS ACCURACY OR COMPLETENESS, NOR SHALL WE BE LIABLE FOR ANY INCIDENTAL OR CONSEQUENTIAL LOSSES OR
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THIS REPORT IS INTENDED SOLELY FOR THE INFORMATION OF THE SPECIFIED ADDRESSEE, IS FOR PRIVATE CIRCULATION AND NOT
INTENDED FOR USE BY PRIVATE CLIENTS AS DEFINED BY THE SFA.

THIS IS NOT A RECOMMENDATION, OFFER OR SOLICITATION TO PURCHASE OR SELL ANY SECURITY, COMMODITY, CURRENCY OR OTHER
INSTRUMENT. THIS REPORT DOES NOT CONSIDER SPECIFIC OBJECTIVES, CIRCUMSTANCES OR NEEDS OF INDIVIDUAL RECIPIENTS.
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SECURITIES SPOT AND FORWARD FOREIGN EXCHANGE, CURRENCY OPTOINS, COMMODITIES AND CERTAIN OTHER PRODUCTS DISCUSSED
HERIN ARE NOT INSURED BY THE FDIC AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF HSBC BANK USA, ARE NOT GUARANTEED BY
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