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foreign-exchange---risk-management---hsbc-bank----5-10

foreign-exchange---risk-management---hsbc-bank----5-10

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02/20/2011

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HSBC Bank USA, N.A.

Trade and Supply Chain

Trade & Supply Chain Foreign Exchange and Risk Management
May 2010

or revolution ± Expropriation ± Inconvertibility of local currency into dollars or other hard currency. (Transfer Risk) y Commercial Risk/Business Risk ± Disputes between buyer and seller.S.Major Risks Related to International Trade y Political Risk ± War. civil disturbance. ± Working capital tied up ± Increasing reliance on bank debt. businesses. y Documentary Risk y Interest Rate Risk y Foreign Exchange Risk ± Foreign Exchange Risk noted as biggest barrier to trade growth over the next six months by U. according to recent Trade Confidence Index . ± Customer illiquidity or insolvency ± Inability to finance company ³investment´ in export accounts receivable ± Control of quality of goods. ± Controlling title to goods pending payment.

Foreign Exchange Market y In today¶s global market place. extensive footprint and local knowledge are characteristics to look for in your trade bank. foreign exchange plays a significant role: 4 trillion U. global presence. 7 days a week. y No formal exchange for currencies. dollars worth of currency is exchanged on a daily basis. 3 . y In this highly dynamic environment. ± ± -Payments -Investments cross-border y Prices available 24 hours a day. Trading is done over the counter in an interbank market and via brokers.S.

Who Uses Foreign Exchange? yImporters/Exporters ±Importers pay in the foreign currency ±Exporters receive payment in foreign currency yMultinational corporations ±Multinationals fund foreign subsidiaries and funds are repatriated back to parent companies yInternational investors ±International investors hedge interest payments with forwards yTour operators ±Tour operators book foreign travel in the local currency ySchools ±Schools make and receive tuition payments in foreign currency 4 .

in a limited number of regions. y Negotiate better pricing ± Importers have the upper hand when they take the responsibility to pay a foreign supplier in local currency. y Reduce risk ± Diversifying your international supplier base reduces the risks associated with doing business with a limited number of vendors. 5 . y Improve profit margin ± Build hedging cost into pricing.Why Use Foreign Exchange? y Competitive edge ± Exporters enhance their customer base by allowing customers to pay in their local currency.

How is Foreign Exchange Used? y Use forward pricing to negotiate sales contracts y Lock in forward pricing when sales contract is firm y Match foreign exchange product to your particular trade cycle and predicted cash flows 6 .

00 0. EUR/U D 1.00 2.50 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04     Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 7 .50 1.Identifying Foreign Exchange Exposure Understanding Foreign Exchange Exposures y A clear understanding of your foreign exchange exposure is necessary to assess risks.90 0.10 4.50 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 3.20 U D/BRL 1.00 1.80 Jan-00 3.40 1. Exposures arise as a result of exchange rate volatility.00 1.30 1.50 2.60 1.

± overseas contract cancellations.Identifying Foreign Exchange Exposure y The main sources of foreign exchange exposure: ± Paying for goods and services priced in a foreign currency. ± EPS or balance sheet volatility. or ± Receiving foreign currency for goods or services provided. y 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 y Exposure can manifest itself in a number of different ways: ± decreased USD cash flows or margins. .

) 9 . Collars. margins. y There are four risk management alternatives available: ± Spot Transaction. ± Forward Transaction ± Purchasing Vanilla Options ± Structured Products (ex.. Participating Forward. etc. etc.Developing a Strategy for Hedging & Risk Management y 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. cash flows. y Companies can hedge these exposures to minimize the foreign exchange impact on their financials. EPS.

Developing a Strategy for Hedging & Risk Management y Importance of an F/X policy ± Philosophy and process for managing cross-border exposure y Cornerstones ± Cash management/online banking platform ± A view into F/X exposure ± Trade/Supply Chain techniques ± Manage payment risk ± Foreign exchange policy ± Manage exposure y When to consider using foreign exchange techniques ± Frequency of foreign exchange trades/year ± 10-15/year ± Trade size ± min.000 per transaction . US$ 20.

y By locking in the rate. y A company can know exactly how many U. a company can protect profits margins and eliminate uncertainty of the value of cash flows. y A Foreign Exchange Forward contract allows a company to pay or receive foreign currency in the future at an exchange rate agreed upon today. dollars they will pay or receive in the future. so they can better forecast their business¶ cash flow cycle and plan operations accordingly.What is the Bottom Line? y Hedging can eliminate the uncertainty of the FX rate that will be used by a company in the future.S. 11 .

CNY. London and Hong Kong) y Extensive geographic footprint (incorporating some 89 branches). and expertise in many local markets give us an additional and unique insight into developments all over the globe The Americas * y y y y y y y New York Canada Brazil Argentina Mexico Chile Bermuda Europe * y y y y y y y y y London France Germany Russia Turkey Israel Dubai Saudi Arabia South Africa Asia * y y y y y y y y Hong Kong Japan Australia China Thailand India Korea Singapore Note: * Not exhaustive lists 12 . Middle East ccy¶s Options Trading Strategies and new ideas Best FX-linked products Most innovative and original research and strategy EM Research and strategy Most Innovative Hedging Strategy Fwds: EM currencies. and both over and under 1yr Research and Analytics on online platforms y FX business operates out of our three main centers (New York. Top 3: GBP. HSBC ranked #2 for Most Impressive Approach to FX .HSBC Foreign Exchange 2008 Euromoney Poll HSBC is consistently ranked as one of the top banks in the world in FX. Asian ccy¶s. We were ranked within the top 3 in 26 of the other categories which cements our overall ranking of 3rd for qualitative criteria. HKD. Who¶s Best Where category in EMEA and Asia & Australia.

COMMODITIES AND CERTAIN OTHER PRODUCTS DISCUSSED HERIN ARE NOT INSURED BY THE FDIC AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF HSBC BANK USA. OR MAY PERFORM OR SEEK TO PERFORM INVESTMENT BANKING SERVICES FOR THOSE COMPANIES MENTIONED HEREIN. THE INFORMATION. 13 . OFFER OR SOLICITATION TO PURCHASE OR SELL ANY SECURITY. CURRENCY OR OTHER INSTRUMENT. ARE MEMBERS OF THE HSBC GROUP. A REGISTERED BROKER DEALER AND A REGISTERED FUTURES COMMISSION MERCHANT. HOWEVER. CURRENCY OR DERIVATIVE INSTRUMENT OR STRATEGY CONTAINED HEREIN. IS FOR PRIVATE CIRCULATION AND NOT INTENDED FOR USE BY PRIVATE CLIENTS AS DEFINED BY THE SFA. HSBC BANK USA AND HSBC SECURITIES (USA) INC. IS A MEMBER OF THE NEW YORK STOCK EXCHANGE. WE CANNOT GUARANTEE ITS ACCURACY OR COMPLETENESS. THIS IS NOT A RECOMMENDATION. COMMODITY. COMMODITIES CURRENCIES OR OTHER INSTRUMENTS MENTIONED IN THIS REPORT OR FUTURES OR OPTIONS CONTRACTS CONVERTIBLE INTO SECURITIES OR OTHER INSTRUMENTS MENTIONED IN THIS REPORT.Disclaimer PRODUCTS AND SERVICES ARE OFFERED BY EITHER HSBC BANK USA. NASD AND SIPC AND REGULATED BY THE SFA FOR THE CONDUCT OF INVESTMENT BUSINESS IN THE UNITED KINGDOM. OR ANY OTHER CIRCUMSTANCES BEYOND OUR CONTROL. MEMBER FDIC. ANY MEMBER OF THE HSBC GROUP MAY FROM TIME TO TIME UNDERWRITE. SECURITIES SPOT AND FORWARD FOREIGN EXCHANGE. CIRCUMSTANCES OR NEEDS OF INDIVIDUAL RECIPIENTS. COMMODITY. AND ARE SUBJECT TO INVESTMENT RISKS INCLUDING POSSIBLE LOSS OF PRINCIPAL. THE INFORMATION IN THIS REPORT IS DERIVED FROM A VARIETY OF SOURCES WE BELIEVE TO BE RELIABLE. RECIPIENTS OF THIS REPORT SHOULD SEEK FINANCIAL ADVICE REGARDING THE APPROPRIATENESS OF INVESTING IN ANY SECURITY. OR HSBC SECURITIES (USA) INC. OR TOGETHER WITH THEIR DIRECTORS. ARE NOT GUARANTEED BY HSBC BANK USA. HSBC SECURITIES (USA) INC. ANALYSIS AND OPINONS CONTAINED HEREIN CONSTITUTE OUR PRESENT JUDGEMENT WHICH IS SUBJECT TO CHANGE AT ANY TIME WITHOUT NOTICE. CURRENCY OPTOINS. INACCURACIES. MAKE A MARKET OR OTHERWISE BUY OR SELL AS PRINCIPAL SECURITIES OR OTHER INSTRUMENTS MENTIONED HEREIN. NOR SHALL WE BE LIABLE FOR ANY INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES INCLUDING BUT NOT LIMITED TO ERRORS (INCLUDING ERRORS OF TRANSMISSION). THIS REPORT DOES NOT CONSIDER SPECIFIC OBJECTIVES. OMISSIONS. THIS REPORT IS INTENDED SOLELY FOR THE INFORMATION OF THE SPECIFIED ADDRESSEE. CHANGES IN MARKET FACTORS OR CONDITIONS. OFFICERS AND EMPLOYEES MAY HAVE EITHER A LONG OR SHORT POSITION IN THE SECURITIES.

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