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FOREX DRAFT

AUTOMATED GROUP LEARNING (AGL)

DRAFT
NO. 11 - FOREX & RISK MANAGEMENT FOR NON-FINANCIAL MANAGERS

COURSE DIARY (Not retained)

Copyright:

LR/RGAB 2005/1 No copies of without written permission.

INDEX

Item 1. 2. 3. 4. 5. 6. 7. Important note on the learning Registration sheet Quiz answer sheets First feedback summary Action plan for the future Second feedback summary Daily learning summary sheets 3 4 6 8 10 11 14

Page No

Appendices: A. B. C. D. E. Optional exercises WSJ Forex Exercise Further readings Some ideas to think about Glossary

1. - IMPORTANT NOTE ON THE LEARNING 1. 2. AGL is specially designed as an intensive learning experience in Forex & Risk Management program for non-financial managers. AGL creates a very special group learning environment that is new to the group members. It is a highly effective but rather challenging learning experience. Members should therefore try to keep an open mind on their reactions until the second day of the program. Members can and do solve ALL the problems and answer ALL the questions, from the special materials provided and the experience of other members of the group. The Organizer is not a teacher. The Organizer's job is to help members to: a. Understand the AGL learning system b. Use fully and effectively the special learning materials and the group experiences. c. Solve administrative problems 5. The Organizer is not usually allowed under AGL Learning Systems to respond directly to technical financial questions, since the learning is better when members help each other. The critical skill of the Organizer is to HELP the participants to WORK TOGETHER to resolve successfully, all questions arising. Thus by the end of the program EVERY QUESTION is resolved! Since the same learning materials are used for both the two day and the three day versions of the course, the Organizer will occasionally outline differences in the timing of some parts of the work. Since 1975 over 25,000 executives have successfully completed AGL programs throughout the world. We hope you too will find AGL stimulating, efficient and effective for you!

3.

4.

6.

7. 8.

2. - REGISTRATION SHEET PART I AGL: Date and location: Name: Title: Organization: Address, telephone, fax: - BASIC DATA:

PART II - PREVIOUS BACKGROUND Please write 1-4 lines on your relevant training and experience in the subject area of the program.

PART III - OBJECTIVES Please complete the attached sheet: "Learner Objective Setting". List below three objectives in your taking the program. 1. 2. 3.

PART IV - QUIZ RESULTS

LEARNER OBJECTIVE SETTING 1. Briefly, what is your idea of a working knowledge of the subject area?

2.

Briefly describe a situation you faced in the last six months which involved the subject area. How did it arise? What did you do? What was the result? What did you feel?

3.

Can you now list (below) 20 technical words, relevant to the subject area, that you need to use frequently?

3. - QUIZ ANSWER SHEET Name: ................................................... Mark each correct answer with a clear "X" 1. a b c d 26. a b c d 2. a b c d 3. a b c d 4. a b c d 5. a b c d 6. a b c d 7. a b c d 8. a b c d 9. a b c d 10. a b c d 11. a b c d 12. a b c d 13. a b c d 14. a b c d 15. a b c d 16. a b c d 17. a b c d 18. a b c d 19. a b c d 20. a b c d 21. a b c d 22. a b c d 23. a b c d 24. a b c d 25. a b c d 27. a b c d 28. a b c d 29. a b c d 30. a b c d 31. a b c d 32. a b c d 33. a b c d 34. a b c d 35. a b c d 36. a b c d 37. a b c d 38. a b c d 39. a b c d 40. a b c d 41. a b c d 42. a b c d 43. a b c d 44. a b c d 45. a b c d 46. a b c d 47. a b c d 48. a b c d 49. a b c d 50. a b c d

51. a b c d76. a b c d 52. a b c d77. a b c d 53. a b c d78. a b c d 54. a b c d79. a b c d 55. a b c d80. a b c d 56. a b c d81. a b c d 57. a b c d82. a b c d 58. a b c d83. a b c d 59. a b c d84. a b c d 60. a b c d85. a b c d 61. a b c d86. a b c d 62. a b c d87. a b c d 63. a b c d88. a b c d 64. a b c d89. a b c d 65.a b c d90. a b c d 66. a b c d91. a b c d 67.a b c d92. a b c d 68.a b c d93. a b c d 69.a b c d94. a b c d 70. a b c d95. a b c d 71. a b c d96. a b c d 71. a b c d97. a b c d 72. a b c d98. a b c d 73. a b c d99. a b c d 74. a b c d100.a b c d

Score: /100

Note of errors for correction later:

3. - QUIZ ANSWER SHEET Name: ................................................... Mark each correct answer with a clear "X" 1. a b c d 2. a b c d 3. a b c d 4. a b c d 5. a b c d 6. a b c d 7. a b c d 8. a b c d 9. a b c d 10. a b c d 11. a b c d 12. a b c d 13. a b c d 14. a b c d 15. a b c d 16. a b c d 17. a b c d 18. a b c d 19. a b c d 20. a b c d 21. a b c d 22. a b c d 23. a b c d 24. a b c d 26. a b c d 27. a b c d 28. a b c d 29. a b c d 30. a b c d 31. a b c d 32. a b c d 33. a b c d 34. a b c d 35. a b c d 36. a b c d 37. a b c d 38. a b c d 39. a b c d 40. a b c d 41. a b c d 42. a b c d 43. a b c d 44. a b c d 45. a b c d 46. a b c d 47. a b c d 48. a b c d 49. a b c d 51. a b c d76. a b c d 52. a b c d77. a b c d 53. a b c d78. a b c d 54. a b c d79. a b c d 55. a b c d80. a b c d 56. a b c d81. a b c d 57. a b c d82. a b c d 58. a b c d83. a b c d 59. a b c d84. a b c d 60. a b c d85. a b c d 61. a b c d86. a b c d 62. a b c d87. a b c d 63. a b c d88. a b c d 64. a b c d89. a b c d 65.a b c d90. a b c d 66. a b c d91. a b c d 67.a b c d92. a b c d 68.a b c d93. a b c d 69.a b c d94. a b c d 70. a b c d95. a b c d 71. a b c d96. a b c d 71. a b c d97. a b c d 72. a b c d98. a b c d 73. a b c d99. a b c d

25. a b c d Score: /100

50. a b c d 74. a b c d100.a b c d Note of errors for correction later:

4. - FIRST FEEDBACK SUMMARY 1. BASIC DATA: AGL: Date and location: Name of member: Title: Organization: Address, telephone, fax:

2. BACKGROUND:

3. QUIZ RESULTS:

4. To what extent did you achieve your personal objectives? Did anything surprise you?

5. Do you have any suggestions for improving the program?

6. What other programs might be useful to your company?

7. At this time , what is your overall evaluation of the program. in terms of content, presentation, administration and usefulness? Excellent Content Presentation Administration Usefulness Note: Please score 1 (poor) to 5 (excellent) Very good Good Fair Poor

8. Other comments:

Signature ...................

date .............

6. - ACTION PLAN FOR THE FUTURE 1. 2. 3. 4. 5. 6. 7. 8. 9. Readings? Group discussion? Publications? Courses? Reports?

7. - SECOND FEEDBACK SUMMARY 1. Basic data: AGL: Date and location: Name of member: Organization:

2. Did you complete the LRT work exactly as scheduled as on days 6, 12 and 24? Could you please explain your reactions and difficulties?

3. For learning research, could you please indicate your reactions to the total AGL experience (circle YES or NO): A1 Was enough guidance, briefing and help provided? A2 A3 A4 A5 A6 Did the program stimulate you?

YES NO YES NO

Did you know the learning objectives before you started? YES NO Do you think you achieved the learning objectives? YES NO

Would you choose to learn this way again? YES NO Were the materials practical and relevant to you? YES NO Were the technical difficulties and shorthand useful in your learning? YES NO Would an experienced teacher have improved the learning environment? YES NO Did you find the materials too confusing at times? YES NO

B1 B2 B3 B4 B5 B6

Were you a little embarrassed during the learning experience? YES NO Did the constraints upset you? YES NO

Did something disturb your learning? What was it? YES NO

4. Have you actually used what you taught yourself in the AGL? ready now for further training?

Do you feel

5. How "efficient" was the AGL learning (doing things right)? Please explain.

6. How "effective" was the AGL learning (doing the right things)? explain.

Please

7. Thank you very much for giving us this second feedback data. Do you have any other helpful comments?

8. Would you kindly return this final feedback summary to the organizer on the 28th day after completion of the AGL program.

8. - DAILY LEARNING SUMMARY SHEET DAY 1 MAIN TOPIC: SEVEN KEY LEARNING POINTS: 1. 2. 3. 4. 5. 6. 7. THREE QUESTIONS UNANSWERED: 1. 2. 3. GENERAL FEELINGS AND REACTIONS TO THE LEARNING ENVIRONMENT: IDEAS TO FOLLOW UP IN THE FUTURE: BLOCKS TO THE LEARNING: OTHER COMMENTS:

8. - DAILY LEARNING SUMMARY SHEET DAY 2 MAIN TOPIC: SEVEN KEY LEARNING POINTS: 1. 2. 3. 4. 5. 6. 7. THREE QUESTIONS UNANSWERED: 1. 2. 3. GENERAL FEELINGS AND REACTIONS TO THE LEARNING ENVIRONMENT: IDEAS TO FOLLOW UP IN THE FUTURE: BLOCKS TO THE LEARNING: OTHER COMMENTS:

8. - DAILY LEARNING SUMMARY SHEET DAY 3 MAIN TOPIC: SEVEN KEY LEARNING POINTS: 1. 2. 3. 4. 5. 6. 7. THREE QUESTIONS UNANSWERED: 1. 2. 3. GENERAL FEELINGS AND REACTIONS TO THE LEARNING ENVIRONMENT: IDEAS TO FOLLOW UP IN THE FUTURE: BLOCKS TO THE LEARNING: OTHER COMMENTS:

APPENDIX A - OPTIONAL EXERCISES - QUESTIONS 1. APHIA CORPN. The Belgian franc spot was quoted at FF O.167 in Paris while the US dollar was quoted at FF 5.064. What would you expect the price of the Belgian franc to be in New York? If the price of BF in New York quoted was quoted at 30,100 how could you make a profit on BF?

2. COOKSEY CORPN. The DM spot was quoted at $0.67 in New York and pound sterling was quoted at $1.50. What would you expect the price of the pound to be in Germany? If the pound were quoted in Frankfurt at DM 2.15/pound, what would you do to profit from the situation?

3. DOUGLAS COMPANY The following rates are quoted by your foreign exchange trader in the United States on the pound sterling spot, l-month, 3 month, and 6-month: $1.5000 63/54 147/135 (1.5063/1.5064) 190/173

How much would you have to pay in dollars to buy l-month pounds? What is the price of 6-month dollars if you were to pay in pounds sterling?

4. LOCAL BORROWING CORPN. Cost of borrowing foreign currencies calculated in US Dollars: Formula: ((Capital/S1) X (1 + iB) X F ) - Capital = interest cost US $ DM Yen 5.0% 3.0% .8% iB .6733/$ .00934/$ S1 .6744/$ .00938/$ F (90 days)

Borrow $500,000 in DM for 90 days: Cost = ((500,000/.6733) X (1+ .03/4) X .6744) - 500,000 = ((742,426) X (1.+.0075) X .6744) - 500,000 = (747,565) X .6744) - 500,000 = Borrow $500,000 in yen: Cost = ((500,000/00934) X (1+ Question: What is the interest cost in dollars for borrowing yen?

$4,447

5.

E-MAIL CORPN. The spot Danish krone is selling for $0.1751 and the 3-month forward is selling for $O.1755. The 3-month interbank rate the U.S. dollar is 6.00% and for the Danish krone is 5.00%. Are the forward rates and interest rates in equilibrium? Why? If not, what would you do to take advantage of the situation? If a large number of individuals take similar actions, what rate trends will appear in the market?

6.

FCA CORPN. U.S. distributor purchases valves from France in the amount of about $1 million. Payment in FF is due in 3 months. The market scenario is summarized in the accompanying table. DAY 1 Exchange rates: Spot 3-month forward Interest (3 month) rates: USA France 5.3% 4.6% 5.3% 4.8% 5.2% 4.8% 5.0% 4.8% $0.19 0.19 $0.20 0.25 0.18 DAY 90 Case A DAY 90 DAY 90 Case B Case C

Questions: On day 1 what is the premium or discount on the forward FF?

What is the 90 day interest differential between the United States and France. Is there an incentive for interest arbitrage?

If the importer wants to cover its transaction against foreign exchange risks what alternatives are open?

In case C what would have been the most profitable alternative?

Would you advise the importer to cover the foreign exchange transaction?

7. LEE CORPORATION Corporation with a net liability position in Switzerland of about SF 160 million. The market scenario is: Exchange Market Spot rate day 1 Expected future spot rate $ 0.90 1 year forward Interest rates - 1 year US dollar 5.35% Swiss franc Questions: 1. What is the premium or discount in the one year forward Swiss franc? 1.55% $ 0.83 $ 0.85

2.

What would be the consequences of the Swiss net liability position if the forecast changes in the spot rate take place? What are the choices that Sancos has to hedge its liability position in Swiss francs? What would a money market hedge cost?

3.

4.

5.

Determine the cost of forward and money market hedges in each of these alternatives if the actual spot rate at the end of the period is as shown in the table below: Spot rate-day 360 Case A Case B Case C $0.83 0.85 0.91

6.

What course of action would you advise Lee to take?

8.

TREASURY DECISIONS As Treasurer of the D'Arcangues Company, diagnose the problems arising from this market scenario: Exchange Market: Spot rate - DM 1.48/$ 3 month forward rate - DM 1.47/$ Money Market - Interbank Euro rates $ 3 months 6 months 5.2% Questions: a. If we borrow DM for 3 months at 3.3%, and invest in dollars for the same period at 5.3%, We do not make any profit when we cover the exchange risk. Why? b. We need dollars for 3 months and we are tempted by the lower interest rates in DM. If we borrow DM for 3 months to meet our financial needs, under what conditions would this be a profitable decision? Under what conditions would this decision generate losses? [Note: expect a dollar inflow in 3 months.] c. Again, we need dollars for 3 months and we are tempted by the lower interest rates in DM. In addition, we would now like to take advantage of the downward sloping yield curve and borrow marks for 6 months (instead of 3 months). If we borrow DM for 6 months to meet our dollar financing needs, under what conditions would this be a profitable decision? Under what conditions would this decision generate losses? [Note: we still expect the dollar inflow in 3 months.] What must we do to cover the exchange position for 3 months? DM 5.3% 3.3%

3.2%

OPTIONAL EXERCISES - ANSWERS 1. APHIA CORPN. The Belgian franc spot was quoted at FF O.167 in Paris while the US dollar was quoted at FF 5.064. What would you expect the price of the Belgian franc to be in New York? Answer: 5.064/.167 = BF 30,323 If the price of BF in New York quoted was quoted at 30,100, how could you make a profit? Answer: Buy BF in Paris and sell them in NY.

2.

COOKSEY CORPN. The DM spot was quoted at $0.67 in New York and pound sterling was quoted at $1.50. What would you expect the price of the pound to be in Germany? Answer: 1.50/.67 = DM 2.24/pound If the pound were quoted in Frankfurt at DM 2.15/pound, what would you do to profit from the situation? Answer: Buy pounds in Frankfurt and sell them in NY.

3.

DOUGLAS COMPANY The following rates are quoted by your foreign exchange trader in the United States on the pound sterling spot, l-month, 3 month, and 6-month: $1.5000 63/54 147/135 (1.5063/1.5054) 190/173

How much would you have to pay in dollars to buy l-month pounds? Answer: $1.5063/1 pound What is the price of 6-month dollars if you were to pay in pounds sterling? Answer: $1.5173/1 pound

4.

LOCAL BORROWING CORPN. Cost of borrowing foreign currencies calculated in US Dollars: Formula: ((Capital/S1) X (1 + iB) X F ) - Capital = interest cost US $ DM Yen 5.0% 3.0% .8% iB .6733/$ .00934/$ S1 .6744/$ .00938/$ F (90 days)

Borrow $500,000 in DM for 90 days: Cost = ((500,000/.6733) X (1+ .03/4) X .6744) - 500,000 = ((742,426) X (1.+.0075) X .6744) - 500,000 = (747,565) X .6744) - 500,000 = Borrow $500,000 in yen: Cost= ((500,000/.00934) X (1+.008/4) X .00938) - 500,000 = ((535,330 X (1. .002) X .00938) - 500,000 = (539,742) X .00938) - 500,000 = Question: What is the interest cost in dollars for borrowing yen? 5. E-MAIL CORPN. The spot Danish krone is selling for $0.17510 and the 3-month forward is selling for $O.17550. The 3-month interbank rate the U.S. dollar is 6.00% and for the Danish krone is 5.00%. Are the forward rates and interest rates in equilibrium? Why? Answer: Not in equilibrium .17510 X (1+ .1/4) X 90/360 = .17514 This is not the same as the forward rate. Why? Due to differences between in inter-bank and money market interest rates. Not due to speculation! If not, what would you do to take advantage of the situation? Answer: Buy krone spot, invest and sell forward.

$4,447

$2,139

If a large number of individuals take similar actions, what rate trends will appear in the market?

Answer:

Equilibrium would be established.

6.

FCA CORPN. U.S. distributor purchases valves from France in the amount of about $1 million. Payment in FF is due in 3 months. The market scenario is summarized in the accompanying table. DAY 1 Exchange rates: Spot 3-month forward Interest (3 month) rates: USA France 5.3% 4.6% 5.3% 4.8% 5.2% 4.8% 5.0% 4.8% $0.19 $0.20 0.19 0.25 0.18 DAY 90 Case A DAY 90 Case B DAY 90 Case C

On day 1 what is the premium or discount on the forward FF? Answer: .20 - .19 = .01 premium What is the 90 day interest differential between the United States and France. Is there an incentive for interest arbitrage? Answer: 5.3 - 4.6 = .7% Yes. If the importer wants to cover his transaction against foreign exchange risks what alternatives are open? Answer: natural hedge or forward, money, various options/swaps. In case C what would have been the most profitable alternative? Answer: no hedge Would you advise the importer to cover the foreign exchange transaction? Answer: Yes. Potential volatility seems high (.18-.25). Simple hedge with a forward contract avoids risk and the trouble of money market operations. More important issue is economic and strategic exposure with suppliers in France with FF rather than $ invoicing.

7. LEE CORPORATION Corporation with a net liability position in Switzerland of about SF 160 million. The market scenario is: Exchange Market Spot rate day 1 Expected future spot rate $ 0.90 1 year forward Interest rates - 1 year US dollar 5.35% Swiss franc 1. 1.55% $ 0.83 $ 0.85

What is the premium or discount in the one year forward Swiss franc? Answer: .85 - 83 = $02 premium

2.

What would be the consequences of the Swiss net liability position if the forecast changes in the spot rate take place? Answer: .90 - .83 = $.07 increased liability (loss)

3.

What are the choices available to hedge the liability position in Swiss francs? Answer: No hedge, forward, money market, option/swaps etc.

4.

What would a money market hedge cost? Answer: 0.83 X (1 + 0.038) = $0.86/SF

4.

Determine the cost of forward and money market hedges in each of these alternatives if the actual spot rate at the end of the period is as shown in the table below: Spot rate-day 360 Answer: Forward Money market Case A Case B Case C $0.83 0.85. 0.91 $0.85 Loss $0.86 Loss Even Loss Profit Profit

4. What course of action would you advise Lee to take? Forward hedge is simple and economic. Options/swaps could be considered for a range of risk.

8.

TREASURY DECISIONS As Treasurer of the D'Arcangues Company, diagnose the problems arising from this market scenario: Exchange Market: Spot rate - DM 1.48/$ 3 month forward rate - DM 1.47/$ Money Market - Interbank Euro rates $ 3 months 6 months

DM 5.3% 3.3% 5.2% 3.2%

a. If we borrow DM for 3 months at 3.3%, and invest in dollars for the same period at 5.3%, We do not make any profit when we cover the exchange risk. Why? Answer: Forward rates are interest rate computations; they not speculative but react to interest rate changes. b. We need dollars for 3 months and we are tempted by the lower interest rates in DM. If we borrow DM for 3 months to meet our financial needs, under what conditions would this be a profitable decision? Answer: If DM depreciates or the US/DM interest rate differential increases. Under what conditions would this decision generate losses? [Note: expect a dollar inflow in 3 months.] Answer: If DM appreciates or the interest rate differential decreases. c. Again, we need dollars for 3 months and we are tempted by the lower interest rates in DM. In addition, we would now like to take advantage of the downward sloping yield curve and borrow marks for 6 months (instead of 3 months). If we borrow DM for 6 months to meet our dollar financing needs, under what conditions would this be a profitable decision? Answer: If DM depreciates at 3 months and then appreciates; or if the interest rate differential changes favorably. Under what conditions would this decision generate losses? [Note: we still expect the dollar inflow in 3 months.] Answer: If DM appreciates at 3 months and then depreciates; or if the interest rate differential changes unfavorably. What must we do to cover the exchange position for 3 months? Answer: Hedge in accordance with an established set of RM guidelines.

APPENDIX C - WSJ FOREX EXERCISE Note: The figures in brackets are for 26 January 2005 given as a guide. 1. In the Wall Street Journal (WSJ) section "Market Summary": a. What is DM/$ rate? (1,4890) b. What is the change in the Pound rate? (-0.0013) c. What is the Dow Jones Industrial Average - Close? (5216.83/-26.01) 2. In the section "Currency Trading": a. b. c. d. e. f. g. h. 3. What What What What What What What What is is is is is is is is the the the the the the the the exchange rate for Malaysian Ringit? (.3907) exchange rate for ECU? (1.2428) ECU value in D-Mark? (1.8809) trade weighted value of the Swiss Franc? (+114.8) first option call price for Japanese Yen in three months? (3.74) spot and 90 day forward for French Francs? (.1960\.1964) spot and 90 day forward for DM? (.6715\.6749\.6715) first option prices for DM next month call\put (.86/.56)

In section "Futures Prices - Euro-currency Deposits":

a. What is the one month rate for DM? (3 3/8 - 3 1/2) b. What is the three month rate for Yen? (3/8 - 1/2) c. What is the one month rate for Sterling? (6 1/2 - 6 3/8) 4. In the "Futures and Options Markets under Currency": a. What is option call cost for next month per 100 Yen of the third strike price? (1.20) b. What is the option put price in two months at the first strike price of Swiss Francs? (1.08) 5. In the section "Currency Crossrates": a. b. c. d. What What What What is is is is the the the the rate rate rate rate of of of of Belgium Francs to the Dollar? (30,600) SF in FF? (4.2643) ECU in DM? (1.83) DFL to Lira? (.00104)

Score /20

APPENDIX B - FURTHER READINGS INSERT

APPENDIX D - SOME IDEAS TO THINK ABOUT INSERT

APPENDIX E - GLOSSARY Agio Premium. For example, percentage by which the market value of a gold coin exceeds its metallic value. Basis point Price quotation of an interest rate (0.01% = 1 bp). Basis Difference between the futures price and the spot rate on a given date. Bid price Price at which a bank is prepared to buy foreign exchange and precious metals or to pay for funds. Broken date Unusual due date or maturity of a forward transaction in foreign exchange. Customary maturities are 1 week, and 1, 2. 3. 6 and 12 months. Other maturities are considered broken dates. Call money Money deposited at a bank for which no special term is agreed. The deposit may, depending on the agreement, be terminated on the same day up to about 10 a.m. daily (1-day notice) or with 2-day notice. Call option An option giving the buyer the right, but not the obligation, to buy the underlying currency or precious metal at a stated price. Call advance Funds lent out at very short notice. which can be called for repayment at any day. CIF Abbreviation of cost, insurance and freight. A price quotation on CIF basis means that the price is understood to include insurance and transport to the designated destination. Closing-out Covering or settling an open position (foreign exchange. precious metal or money market instruments) by the corresponding counter transaction. Example: covering foreign currency sold forward by the corresponding forward purchase. Company profile Summarizes an analyst's perspective on how a company is performing and why. The following three types of comparisons are usually used to develop a company profile: historical comparisons, competitive comparisons, and normative comparisons. Directly related to RM.

Convention Written formal agreement. e.g. for the uniform specification of certain interest rates or foreign exchange rates. Corporate strategy Directly related to RM. Overall business strategy with three components: corporate mission, product market strategy and competitive strategy, which interact all the time. It is easier to build up a coherent, unified business strategy from a synthesis of these three components, which provide the basis for measuring its internal consistency. To develop corporate strategy: a VIEW leads to a VISION of what the future holds, identifying COMPETITIVE arenas, and SOURCES of competitive advantage. This leads to development of a corporate MISSION, from which POSITIONING can enable a COMPETITIVE strategy and a PRODUCT/MARKET strategy. Cross rate The calculated foreign exchange rate from two separate quotations containing the same currency e.g. rates of SF 1.20/$ and DM 1.50/$ result in a cross rate of SF 0.80/DM. Currency The monetary unit of a country or group of countries. Depending on the international confidence placed in a currency, it could be perceived as "hard" (strong/stable) or "soft" (weak/unstable). Delivery Placing a specified amount of foreign currency or metal at the disposal of the buyer in the account or at the location designated by him. Devil's advocate approach Develops a solid argument for a reasonable recommendation. Then subjects that recommendation to an in-depth, formal critique completed by a formally appointed devil's advocate. Through repeated criticism and revision, the approach leads to mutual acceptance of recommendations. Useful for exploring RM policies. Direct quotation A certain amount (100 or 1) of a foreign currency expressed in the local currency e.g DM 1.75 = $1. Discount Difference between a forward price or rate and the spot price or rate where the forward price or rate is lower than the spot price or rate. Directly related to RM. Environmental turbulence The amount of change and complexity in the environment of a company. The greater the amount of change in environmental factors, such as technology and governmental regulations, and/or the greater the number of environmental factors that must be considered. the higher the level of environmental turbulence.

Eurodollar Balances on deposit and receivables denominated in US dollars in the Euromarket. Euromarket Money and capital markets worldwide on which currencies are traded outside the sovereign territory of the currency Expiration date The last day on which an option may be exercised. Fixed advance Sum of money to be repaid at a fixed date (as a rule with I-month, 3-month or 6-month notice). Forex/Foreign exchange Monetary claims denominated in foreign currency, especially credit exchange balances in bank accounts, checks and bills of exchange. Foreign exchange rate The price of a currency in units of a different currency. Forward See outright. Forward rate Spot rate adjusted forward by the mathematical difference in interest rates. Forward transaction Foreign exchange or precious metal transaction where the delivery obligations of both parties are fulfilled later than 7 business days after the deal was arranged. Foreign exchange transactions due within above time frame are, for the sake of simplicity, classified as spot transactions and professionals speak in this case of a "long spot:~ Futures Standardized forward contracts traded officially on an exchange. General managers Managers who are responsible for the performance of an entire organization or a significant part of an organization which is often called a strategic business unit (SUB). Directly related to RM. Hedging Transaction to eliminate risk of loss due to price or rate changes in currency, money market or commodity trading. These are not speculative transactions but covering transactions to fix a specific rate or price level. Includes: forward contracts, money market operations, futures, options, swaps and "natural hedging". Indirect quotation A unit of a local currency expressed in a foreign currency e.g. $1.50 = 1 Pound

Initial margin The margin required to be deposited by the buyer and seller via the broker or bank with the clearing house. Interest rate The interest return on a capital sum expressed in percent and calculated per annum (p.a.). Intrinsic value The excess of the market value of an underlying instrument over the strike price of an option. Legal tender coins Coins minted after 1850 that were accepted as legal tender and have not been remitted since. Examples: Vreneli, Napoleon, Eagle, Sovereign (old). LIBID London Interbank Bid Rate. Interest rate at which first rate banks are willing to borrow Eurofunds. LIBOR London Interbank Offered Rate Interest rate at which banks are willing to lend Eurofunds to prime banks. Liquidation Closing out or compensating a forward transaction by a corresponding counter transaction with the same maturity or due date. Liquidity 1. Narrow sense: ability of an enterprise to meet its payment obligations on time. 2. Wider sense: availability of cash and cash-like funds on the money and capital markets of a national economy or the world economy. Loco (Zurich) A "loco" price quotation means that the merchandise will be delivered to a specified place free of charge or expenses. Long Open buying position. Long spot See forward transactions Middle Rate The average of the bid and offered rates. Mission statement Broad statement of a firm's direction and purpose. Tool for developing corporate strategy. Statement of what role the company will seek to play in order to achieve its vision: what needs does it wish to satisfy in which markets with what products/services against which competitors and how will it measure its success. Directly related to RM.

Natural Hedging Hedge which balances exposures and thus eliminates FOREX risk e.g equal assets and liabilities, or cash receipts and payments, in the same country/currency. Most effective RM hedging. Offered price Price at which a bank is prepared to sell foreign currency and precious metals or to lend funds. Operational risk Refers to the possibility that new strategies and plans will fail. Directly related to RM. Opportunity cost The loss of value of one course of action compared with what could have been achieved by a better one e.g. buy $ forward 180 days at SF 1.50 only to find that the spot rate later became SF 1.20! Opportunity cost (loss) SF .030/$. Option Right to buy (call) or sell (put) an amount of another currency at a fixed exchange rate. Many complex put/call combinations available. May be valuable (in the money) or not (out of the money). Two confusing terms: "long position" implies "buy (call up)" and "short" implies "sell (put down)". Option - average (asian) Option where the strike price is the average rate since the was bought; may be "fixed" (like a normal option) or "floating" (similar to lookback but still an average). Option - barrier May be "extinguishable" starting normally and lapsing when a specific barrier spot price is reached. Or it may be "exercisable" (activated - "in the money") when the barrier is hit). Option - box Combination of a spread options. May be a vertical spread in calls with a corresponding vertical spread in calls. Option - butterfly Purchase of two call options at different prices (at 120 and 130) and sale of call option at a middle price (at 125). Gives a profit profile similar to straddle, but limits losses if the position moved out of range. Within a range of volatility will have a lower cost than a single option. Option - compound Includes a "mother" option with standard features but the underlying asset is "daughter" option. Used to manage a risk to a contingent cash flow (tender) or to take a position on an implied volatility (like a locking in a volatility level). Option - conversion Purchase of a put option and sale of a call option and making a forward contract to buy (call) at the option expiry date. Doing the opposite is called a "reversal". Basic arbitrage technique between the option and forward markets.

Option - lookback A lookback call option allows purchase at the minimum option lifetime price. A lookback put option option allows the owner to sell at the highest lifetime price. Option - spread Simultaneous purchase and sale of two options of the same type (put or call) . A "time spread" involves different maturity dates. A "vertical Spread" involves different strike prices. Option - straddle A put and a call on the same currency at the same exercise price and maturity. Technique for betting on the low volatility of a currency. Profitable for the seller within a price range with unlimited losses outside that range. Option - strangle A put and a call on the same currency at different exercise prices but the same maturity. Technique for betting on the low volatility. Protects the seller buyer within a range of volatility at a lower cost than a straddle. Outside the range losses ar unlimited. Option - strap Two calls and one put at the same exercise price and maturity. Technique for betting on the volatility where the buyer expects currency to rise rather than fall. Option - strip Two puts and one call at the same exercise price and maturity. Technique for betting on the volatility where the buyer expects currency to fall rather than rise. Option writer Seller of an option. Outright A forward foreign exchange purchase or sale which is not matched by a counter spot transaction. Overnight (ON) Swap or deposit from the day the transaction is concluded to the following business day. i.e., for 1 day (3 days on weekends). Planning horizon The time frame for planning strategic activities and for accomplishing strategic goals. This time frame is often 5 years, but the appropriate horizon depends on the industry. For example, 2 years in the fashion industry and 10 or 15 years in the forest products industry. Directly relevant to RM. Premium Difference between a forward price or rate and the spot price or rate where the forward price or rate is quoted higher than the spot price or rate.

Product/market strategies - external growth RM is related to acquisition growth strategies that achieve control of other existing businesses by: 1. Horizontal integration - buying competitors with product/services in the same stage of the production/marketing chain. 2. Vertical integration - buying suppliers or customers 3. Concentric diversification - buying companies similar with products/markets or different product/markets,in order to achieve some other form of synergy and competitive advantage. 4. Conglomerate diversification - buying businesses for investment attractiveness and other financial criteria; product/market synergies not planned. Product/market strategies - internal growth RM is related to internal growth strategies that use current competencies to achieve low risk steady growth, by: 1. Concentration - on current business with single market/technology activity. Comment: Lowest risk; slow growth; narrow range of investment options; normal profit. 2. Market development - provide products with only cosmetic modifications, to customers in related market areas, with new distribution channels or a changed marketing mix. Comment: Low risk; slow growth; normal profit. 3. Product development - modify existing products or create new related products; market to current customers through /established distribution channels. Comment: Moderate risk; slow growth; improved profit. 4. Innovation - respond by evolution or revolution, to customer/market expectations with highly improved or new products/services; aim to achieve high customer acceptance; on impending product maturity, move to new product/services and thus make the older products obsolete. Comment: High risk for R&D and pre-marketing cost; often very high initial profits; difficult to achieve long-term success. 5. Joint ventures - cooperate with another company to obtain competitive advantage in a particular environment or to acquire a special skills or resources currently lacking. Comment: Moderate risk; faster growth; improved profitability; successful long-term cooperation may well result in a merger. Productivity - strategic Strategic productivity improvement each year can be measured with two indices (which should exceed 1.0): 1. Increase in % of sales/increase in % of payroll cost 2. Increase in % of sales/increase in % of assets employed

Put option An option which gives the buyer the right, but not the obligation, to deliver the underlying currency or precious metal at a fixed price. Risk management (RM) The ability to identify, measure and assess limits to acceptable financial risk, which an organization may, at reasonable cost, defray or reduce, using available market instruments. There are basically four risks for which RM has been extensively applied: interest rates, foreign exchange, commodity prices and equity prices. RM Risk management. Roll-over credit Medium to long-term credit on the Euromarket with a floating interest rate which is usually reset every 3. 6 or 12 months. Roll forward Avoid settlement of a FOREX position until a future date. Segmentation - consumer markets RM is related to segmentation variables: 1. Geographic - Region, country, city, area 2. Demographic - Age, sex, family size, family life cycle, income, occupation, education, religion, nationality 3. Psychographic - Social class, personality, interests, attitudes, values, lifestyles, opinions, orientations 4. Behavioristic - Purchase occasion, benefit sought, use status, use rate, loyalty status, attitude to product/services Segmentation - industrial markets RM is related to segmentation by geography, size, industry, application etc. Allows a company to exploit its resources better by selecting compatible customers. Allows more sharply focused strategies. Segmentation is more apt to develop customer loyalty since the firms offering is more geared to that market. Short Open selling position. Spot transaction Foreign exchange transaction in which the fulfillment of the mutual delivery obligations usually takes place 2 business days after the deal was concluded. Spot next (SN) Swap transaction whose spot element has the regular spot value date and whose forward element becomes payable one business day later.

Stakeholder All groups that have a vested interest in a firm's performance and actions. These groups may be external to the firm, e.g. members of the local community, stockholders, customers, suppliers, and creditors: or internal to the firm e.g. top managers, operating managers, staff, and hourly employees. Stop-loss order Order to buy foreign exchange or precious metals (in the case of a short position or to sell (long position) if the rate or price rises above or falls below a specified limit. As soon as the price or rate reaches the specified limit, the order is carried out at the next rate. Depending on the market situation, the latter can differ widely from the specified limit price or rate. Directly related to RM. Strategic business plan RM is related to this action-oriented document that describes the mission, strategic thrust, and major actions for an entire organization or an SBU. The plan also usually includes resource allocations, major implementation steps and pro formal financial statements. Strategic Marketing RM is related to strategic marketing is part of corporate strategy, which has three interacting components: the corporate mission, the product/market strategy, and the competitive strategy. The corporate mission depends upon a "Vision" for the company which concentrates energies on a common goal, and yet lets opportunities emerge. Strategic business units RM is related to planning units within a large, diversified company.A strategic business unit (SBU) must serve an external, rather than internal, market; must have control over its own destiny; should have a clear set of external competitors; and should be a true profit center. Strategic thrust RM is related to a broad statement of strategic actions that are intended to occur during the planning horizon. Strategic management RM is related to this ongoing planning and analysis of a firm co-aligned with its environments while capitalizing process that attempts to external opportunities and minimizing or avoiding internal weaknesses ,and external strengths. Strategic management is also a future-oriented proactive management system. Strike price Price at which the option buyer acquires the right to buy or sell the underlying currency or precious metal. Swap transaction Changing the maturity of a transaction while retaining the coverage against FOREX risk. Spot sale of a currency against a different currency and simultaneous forward repurchase or the other way around.

SWOT Analysis Analysis of strengths, weaknesses, opportunities and threats, for developing and implementing competitive and product/market strategies. Directly related to RM. Threat, industry-wide A problem or potential problem for all or most companies in an industry. Directly related to RM. Threat, company-specific A problem or potential problem that may result from the interaction between company weaknesses and present and future negative environmental variables and industry-wide threats. Tick Minimum price change, up or down, in a currency futures. Time deposit Money placed by the customer in a bank account at a specified interest rate for a fixed period of time. In Switzerland. time deposits have a term of 3-12 months as a rule, with shorter maturities possible in the case of larger amounts. Tomorrow next (TN) Known as "Tom Next" this is a swap whose spot element becomes due on the business day following the date on which the swap was concluded and whose forward element becomes due on the following business day, meaning on the regular spot value date. Turn Last business day of a month. Value date The delivery date of a foreign exchange, precious metal or money market transaction. Variation margin Payment demanded by a broker or bank to maintain the level of the initial margin. Vertical integration RM is related to buying suppliers or customers. Comment: increased dependability of supply and production volumes; broad management risk; higher financial risk from restriction to one industry. View RM is related to two meanings: a. In FOREX a "view" is a judgment on a future currency movement which can justify the use of options/swaps or non- hedging of a risk. b. In strategic management a "view" is a tool for forming a "vision" of what the future holds; and what may be the anticipated regulatory, competitive, economic and geopolitical environments in which the company must compete.

Vision RM is related to this tool for developing corporate strategy. An energizing picture, based on a view of the future, of what top management wants the company to become. Visions that awake extraordinary performance have three things in common: a noble purpose, a sense of urgency, and clear boundaries. The corporate mission depends upon a "Vision" for the company which concentrates energies on a common goal, and yet lets opportunities emerge. Volatility Range of the daily price or rate fluctuations of foreign currencies, precious metals, interest rates, securities, option contracts, and so on. Weaknesses RM is related to internal characteristics of an organization that inhibit its ability to carry out tasks, or characteristics that the organization does not have that competitors do, which create a competitive disadvantage.

retro4 DRAFT/

AUTOMATED GROUP LEARNING (AGL)

DRAFT
NO. 11 - FOREX & RISK MANAGEMENT FOR NON-FINANCIAL MANAGERS

GUIDE (To be used and handed back to the Organizer)

Copyright: RGAB/JH/LR 2005/1 No copies of without written permission.

QUIZ Choose the "most correct" answer and mark the answer sheet a, b, c, d with an "X". PLEASE DO NOT MARK THE QUIZ. Section 1 1. When the forward price of the $/FF is quoted arithmetically higher than the spot price or rate, there is a ... on the dollar. a. b. c. d. Discount Premium Intrinsic Computer error

2 2.

The calculated foreign exchange rate from two separate quotations containing the same currency (e.g. SF 1.20/$ and DM 1.50/$ resulting in SF.80/DM, is a: a. b. c. d. Cross rate Direct quotation Closing-out Swap

1 3.

Forex "transaction" profits and losses are normally charged to: a. b. c. d. Income statement Equalization reserve Depends upon the policy Someone else

1 4.

Quotation of units of local currency for a unit of a foreign currency (e.g. SF1.20/$1), is: a. b. c. d. Indirect Direct Intrinsic Dangerous

2 5.

An exporter paid in Lira, sells Lira forward 3 months to hedge the risk. When will he know the opportunity cost of the hedge? a. b. c. d. Immediately Within a month In three months Never

6.

To buy SF for $, if the spot rate SF1.188/$ and interest rates are US 6%/Suisse 2%, then the forward rate will be: a. b. c. d. Lower (SF at premium) Higher (SF at premium) Dependent upon economics Dependent upon politics

1 7.

"When the forward rate is below spot, then devaluation is a strong possibility, so we should cover the risk". This statement is: a. b. c. d. True False Generally true Morally unreliable

2 8.

Transactions to eliminate risk of loss due to price or rate changes in currency, money market or commodity trading, are always: a. b. c. d. hedges futures options forward

1 9.

Bank offered interest rate at which banks are willing to lend Eurofunds to prime banks, is: a. b. c. d. Livid LIBID Lipid LIBOR

4 10.

The hedge that expands the balance sheet is a: a. b. c. d. Option Money market deal or BSI Forward contract Futures contract

11.

Global out-sourcing of goods and services must include risk. a. b. c. d. True Generally true False Best left to the accountants

1 12.

When the interest rates are lower in USA than in Belgium, then the BF will be at a forward ... on spot. a. b. c. d. Premium Discount Dependent upon demand Dependent upon the FF

2 13.

The most commonly used hedge in business is: a. b. c. d. Futures contract Option Money market deal Forward contract

4 14.

If we borrow DM at 3.5% and invest in $ at 5.3% for three months, and cover ourselves with a forward DM purchase, we do not usually make any profit because: a. b. c. d. Forward rates depend upon interest differentials Options are expensive Handling costs Forward rates depend on risk

1 15.

The risk of being at a competitive disadvantage from overseas suppliers or competitors, is: a. b. c. d. Transaction risk Translation risk Economic or strategic risk Contingency risk

16.

The choice of Forex strategy for managing currency risk may depend in large part on company's competitive position. This statement is: a. b. c. d. Generally true True only for exporters Generally false Irrelevant

1 17.

When a corporate treasurer believes that the currency market will not change significantly, his best hedge is usually a: a. b. c. d. Option Future or forward Swap None

4 18.

The Forex risk from current foreign currency cash flows for purchases and sales, is: a. b. c. d. Transaction risk Translation risk Economic or strategic risk Contingency risk

1 19.

The incorporation of overseas assets and liabilities into the consolidated balance sheet of the holding company with its related accounting rules, is: a. b. c. d. Transaction risk Translation risk Economic or strategic risk Contingency risk

2 20.

The only hedges that are always revalued daily are: a. b. c. d. Options and swaps Futures contracts Money market deals Exhausting

Section 2 21. To hedge by limiting downside risk but leaving the upside for possible profit, involves: a. b. c. d. options minor crime leaving the position open standard forward contracts

1 22.

F = S times (1 + (id x t/360)))/(1+(if x t/360)) is the formula for what currency rate? a. b. c. d. Option Backward Money market Forward and future

4 23.

Simultaneous purchase and sale of two options of the same type (put or call) with different maturity dates or strike prices, is known as a: a. b. c. d. Stag Straddle Butterfly Spread

4 24.

A put and a call option in the same currency at the same exercise price and maturity, as a bet on the low volatility of the currency, is known as a: a. b. c. d. Stag or long butterfly or condor Straddle Creepy crawly Spread

1 25.

An option giving the buyer the right, but not the obligation, to buy the underlying currency at a stated price, is a: a. b. c. d. Forward Future Call option Put option

26.

Unless there are favorable currency movements, the option is usually ... than other hedges. a. b. c. d. More expensive Cheaper Faster Easier

1 27.

The price at which the option buyer acquires the right to buy or sell the underlying currency or precious metal, is: a. b. c. d. Spot Long Strike price Secret

3 28.

A Forex "lock in everything policy" not followed by competitors, might be: a. b. c. d. A competitive disadvantage Conservative financial policy Avoiding all losses Skilful use of exotic options

1 29.

An irrevocable contract to buy or sell any amount of currency in the future at a presently specified price, is a: a. b. c. d. Forward Bargain Swap Option

1 30.

A ready-made contract to buy or sell a standard sum of currency in the future at a presently specified price, but with an initial down payment and possibility of having to make further daily payments, is a: a. b. c. d. Forward Future Swap Exotic option/swap

31.

An option which gives the buyer the right, but not the obligation, to buy underlying currency at a fixed price, is: a. b. c. d. Put Call Swap Risky

2 32.

We can "lock-in" or "freeze" the specific future exchange rate today with all except: a. b. c. d. Money market deal Forward contract Option not exercised Futures contract

3 33.

A transaction for a spot sale of a currency against a different currency and simultaneous forward repurchase, is a: a. b. c. d. Swap Future Spot Naive mistake

1 34.

The minimum price change, up or down, in a currency future, is a: a. b. c. d. Tock Tuck Tack Tick

4 35.

Which hedge needs a "view" to avoid being pure speculation: a. b. c. d. Futures contract Forward contract Money market deal None of the above.

36.

A contract that offers the right but not the obligation to buy or sell currency in the future is a: a. b. c. d. Forward Future Swap Option

4 37.

Covering or settling an open position (foreign exchange. precious metal or money market instruments) by the corresponding counter transaction (e.g. covering foreign currency sold forward by the corresponding forward purchase), is a: a. b. c. d. Closing up Closing-out Off-putting Swap

2 38.

Some hedgers will deliberately hedge for a shorter period than the exposure, and plan to "roll forward" the hedge at more favorable interest rates in the future. This is: a. b. c. d. Currency speculation Interest rate speculation Not based on proper view Naughty

2 39.

The ability to identify, measure and assess limits to acceptable financial risk, which an organization may, at reasonable cost, defray or reduce, using available market instruments, is: a. b. c. d. Financial risk management Forex management Strategic management Natural hedging

1 40.

In RM, the best possible hedge would be a: a. b. c. d. Perfect natural Cheap option Forward Green privet

Section 3 41. Closing out or compensating a forward transaction by a corresponding counter transaction with the same maturity or due date, is: a. b. c. d. Liquidation Leverage Call advance An honest reaction

1 42.

The key to RM is: a. b. c. d. Accounting standards Astrology Reliable information from operating managers Bank relationships

3 43.

A position of having over-sold (deficit) is known as: a. b. c. d. Long spot Spot Short Long

3 44.

The range of the daily price or rate fluctuations of foreign currencies, precious metals, interest rates, commodity prices, equity prices etc. is: a. b. b. d. Variation Volatility Time fluctuation Very annoying

2 45.

The risk from current commercial activities, where risk may arise only if tendering for a contract is successful, is: a. b. c. d. Transaction risk Translation risk Economic or strategic risk Contingency risk

46.

All of the following are key uncertainties, facing industry, commerce, exporters, importers, and others active in international trade, EXCEPT: a. How do the foreign exchange markets function? b. If there really is a risk of loss from fluctuating currencies, and what should be done about it? c. What is really at risk? d. What instrument is best to manage this risk for the year? The price quotation of an interest rate (0.01%), is the: a. b. c. d. Basis point Bid price Acne spot Agio

1 47.

1 48.

Treasurer with large floating rate borrowing is concerned that interest rates may rise in three months but does not want to give up the possible gain from future falling rates. The hedge to use is: a. b. c. d. Cap and option Forward Money market Swap

1 49.

All of the following are steps in managing financial exposure, except: a. b. c. d. Identifying risk exposure Quantifying risk exposure Establishing accounting policies to manage the risks Implementing risk programs

3 50.

All of the following are key considerations in developing risk management programs, except: a. b. c. d. General approval of the banks Acceptance of the concept that the risk is manageable. Relationships with financial institutions Recognition of the impact of the risk on the balance sheet and income statements.

51.

All of the following are alternative objectives for RM, except: a. b. c. d. Lock in a fixed price for future period. Lock in limits to risk while taking advantage of potential gains. Exchange a known price for an unknown price and vv. Protect against all losses.

4 52.

In the 1990's risk management should be: a. b. c. d. Not really necessary Costly Dangerous Normal financial management

4 53.

An American option differs from a European option by being: a. b. c. d. Exercisable at any time Less expensive Cooler Limited maturity

1 54.

The risk that needs to be hedged in Euromarkets is primarily: a. b. c. d. Interest Foreign exchange Commodity Health

1 55.

Leaving positions unhedged may be: a. b. c. d. The same as hedging in the long term The same as hedging in the short term Avoiding most losses since rates are a "random walk" A disgrace

56.

Hedging on a large new sales contract should generally be done at the time of: a. b. c. d. Signing the contract Starting the contract work Annual budget Completing the major work

1 57.

All of the following are key reasons for using RM tools, except: a. b. c. d. Balance sheet management. Maximizing economic gains. Protecting the current or future income stream. Un-controlled speculation.

4 58.

An agreement to exchange one currency for another at a specified date and price, and later reverse the transaction, as a series of forward contracts, is probably a: a. b. c. d. Forward Potential disaster Forex swap Option

3 59.

"Bridge financing" in practice is the major use of: a. b. c. d. Forex swap transactions Money market loans Futures contracts Options

1 60.

When a company sets up a Financial Unit as a profit center, the most critical problem is usually: a. b. c. d. An adequate system of controls Equipment and management skills Pressure to perform leading to taking risk rather than risk hedging Fraud prevention

Section 4 61. Money and capital markets worldwide, on which currencies are borrowed and re-loaned, outside the sovereign territory of the currency, are called: a. b. c. d. Libor Dollar exchanges Euromarket Livid

3 62.

A UK based treasurer must make large payment in SF in three months time. If he expects sterling to go down then he could legitimately do all except:: a. b. c. d. Do nothing Look for natural hedging Use the forward market Purchase an option.

1 63.

When the Financial RM Unit is a "profit center", the most difficult problem is usually: a. b. c. d. Avoiding excessive risk. Auditing effectively Fraud High investment in equipment and staff

1 64.

Without a "view" to use options, is usually: a. b. c. d. Low risk Gambling Effective hedging Acceptable by most companies

3 65.

All of the following are alternative times to hedge the risk of a sales contract order, except: a. b. c. d. Order being negotiated Order placed Order invoiced Payment received

66.

For a company importing German cars into the USA and being invoiced in DM,, the simplest way to remove short term Forex uncertainty is usually: a. b. c. d. Swaps Futures Options Forward contracts

4 67.

Monitor RM operations by all of the following except: a. b. c. d. Guidelines Audit Reporting Insurance

4 68.

A UK company which regularly exports to France and for competitive reasons, invoices in FF, then locating French suppliers for some of its own requirements for materials, components and bought out assemblies. This action would be: a. b. c. d. Natural hedging Operational hedging Commodity hedging hedging

1 69.

"Agency cost" results from: a. b. c. d. Excessive hedging Unhedged risk Options Property deals

1 70.

The RM that involves looking at risk exposure of the company's overall future cash flows, not those linked to a single transaction, is: a. b. c. d. natural operational strategic financial

71.

Many top managers fail to fully understand the firm's sensitivity to various kinds of risk, thus the critical need is to: a. b. c. d. Identify and quantify risk exposure. Establish RM strategies and policies. Implement and monitor the RM programs regularly. All of the above

4 72.

Requirements for successful RM are all of the following, except: a. Approval and support of the CEO and board of a specific policy on RM and the use of derivatives. b. Reliance on the traditional industrial practice. c. Acceptance of the RM concept by all operating managers to ensure valid forecasts of risk exposure. d. Relationships with financial institutions and Euromarkets and recognition of the impact of RM on financial reporting, earnings, cash flow and credit rating. RM disasters are typically caused by all of the following, except: a. b. c. d. Fraud Derivative being misunderstood Derivative being mis-used. Derivative failure to do what it was supposed to do.

2 73.

4 74.

The key to efficient and effective RM: a. Complexity in making computations. b. Bank advice c. Increasing cooperation between financial and operating managers throughout the company. d. Expertise of the Banker.

non-financial

75.

Overall companies reveal very little about their RM strategy, so it is hard to tell if it benefits the managers or the shareholders. Managers with large shareholding may tend to hedge ... those with share options, because share prices depend upon so many factors out of management control. a. b. c. d. more than less than the same as far less

1 76.

Accounting rules tend to restrict RM to legal or "booked" exposure. Published annual reports fail to disclose the real extent of RM hedging and the potential liabilities. This statement is: a. b. c. d. False Generally true Irrelevant True

2 77.

In 2005, the most common use of hedging is to protect against: a. Market rate changes b.Fraud c. Inflation d. Recession Changing the maturity of a transaction while retaining the coverage against Forex risk (spot sale of a currency against a different currency and simultaneous forward repurchase or the other way around) is a" a. b. c. d. Forward Backward Forex swap Option

1 78.

79.

An option that includes a "mother" option with standard features but the underlying asset is "daughter" option. Used to manage a risk to a contingent cash flow (tender) or to take a position on an implied volatility (like a locking in a volatility level), is a: a. Butterfly b.Eagle c. Lookback d. Lookforward An instrument offered by banks as an alternative to market traded interest futures tailored to customer needs and maturity dates, is an: a. b. c. d. Option Forward Swap FRA

1 80.

ANSWERS

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GUIDE TO CASES ASSIGNMENT 6.0 LECTURE - MERRILL B1 6.1 STORY OF THE CASE AND KEY ISSUES a. In early July 1992, the management of Merrill Electronics, a medium sized US company distributing personal computers, equipment, software, consumer electronics and domestic appliances, were concerned about Forex risk. Company imported half of the products it sold from Japan, Taiwan, and other Asian countries. Fluctuation of the dollar/yen exchange rate during past years had a serious impact on costs and earnings. Company relatively new to the import business and unaware of potential Forex problems. During past months, the depreciating dollar caused an import bill of $370,000 higher than if it were stable. This was now a key management problem. b. Forex issues facing exporters, importers, and others active in international trade, include: 1. 2. 3. 4. What is really at risk? If there really is a risk of loss from fluctuating currencies, what should be done about it? What instruments are appropriate to manage this risk? How do the foreign exchange markets function, and what is their relation to the financial markets?

6.2. WHAT HEDGING METHODS ARE AVAILABLE? DO THEY REQUIRE A FOREX "VIEW"? WHAT HAS HAPPENED TO THE DOLLAR/YEN VIEW IN RECENT YEARS? a. Hedging methods available: 1. 2. 3. b. c. Lock-in: forward contract, money market; currency futures Worst case protection: currency options. Uncovered risk - no hedging

(2) above may perhaps require a "view" of the $/Yen rate. From 1985-90, the U.S. dollar was widely considered to be overvalued, by about 35% above its 1980-1982 average value. By July 1992, the dollar is widely dais to be undervalued.

6.3. COMPARE THE HEDGING ALTERNATIVES a. Lock-in the Future Exchange Rate Merrill could fix on July 8 the dollar cost of buying 225 million by: 1. 2. 3. Forward contract Money market transaction Futures contract

The cost of these hedges are directly related to interest rates in the two currencies. b. Forward Contract Hedge - a three-month forward contract on 8 July to buy 225 million for delivery on 8 October would cost $1,800,720 at the forward rate of 124.95 per dollar. Considerations: 1. 2. 3. 4. 5. 6. b. Does not effect cash until maturity. Exchange rate and the time period are specified. Known dollar cost for settling the Yen payable. May need bank collateral Most common currency hedge. Depends on the Yen and Dollar interest rates

Money Market Transaction Hedge - buying yen on 8 July, investing it until October would cost $1,814,432. Based on Euro/Yen deposit rate of 4 5/16% $ domestic loan rate 6.25% (prime 6.00 + 25 basis points). Considerations: 1. 2. 3. 4. Creates an short term asset and liability in the same currency. Expands the balance sheet and uses up credit lines. Depends on the yen and dollar interest rates. Locks in a known Dollar cost, which is higher than a forward.

c.

Futures Hedge - from an exchange broker would cost $1,810,667. Buy Yen futures in July, to sell futures back to the market in October. The profit/loss on the futures position offsets the profit/loss on the underlying exposure. Considerations: 1. 2. 3. 4. 5. 6. 4. 5. 6. Few corporate treasurers use futures. "Basis" (interest) risk (because the October date is not the future delivery date) Cash funding may be tied up. Margin of $1,500 per contract placed with the broker. Contracts are revalued daily. Difficult to monitoring. Standard size/maturity dates Managers may not understand how they work. Useful for small exposures where banks quote unfavorable forward contract rates.

d.

Option Hedge - premium to the option writer [seller] of the American option, that can be exercised at the strike price at any time and would cost $ 38,848. Adds a premium of $0.0170 per Yen 100 for an October call. Total cost of yen if call is exercised: $0.8170. Costs more than the forward contract at $0.8003 per Yen 100, but gives the opportunity to profit from a cheaper yen in October if available. Considerations: 1. 2. 3. 4. 5 Few American options are exercised; usually they are sold back to the market prior to expiration. Does not "lock-in" an exchange rate; indicates only the worst outcome and thus locks-in a "floor". . Hedging with options, with markets that have high volatility (where we have no "strong view". When the buyer has a strong VIEW that the currency will move favorably, better to leave the position open. The option is always more expensive than other hedges unless there is a enough of a favorable movement to offset its cost.

6.4 a.

HEDGE HORIZON CHANGES The consequences of prolonging a forward contract (hedging for a shorter period than was needed), are not costly even if the exchange rate were to move against them - if the yen were to strengthen in the Merrill case. However if the customer fails to pay on time then this cost be costly! Some hedgers may hedge for a shorter period than the underlying exposure, planning to roll forward the hedge at more favorable interest rates in the future. This is interest rate, not currency speculation. To shorten the maturity of a forward contract, merely take an offsetting position.

b.

c.

Assume Merrill bought forward yen for 90 days delivery but decided after 60 days that the hedge was no longer needed. It removes the 90 day hedge by selling forward for 30 days the same amount of yen. The yen purchased under the first contract are used to settle the second. The overall result is the cost of the two hedges. 6.5 a. b. c. NEW DATA FOR SETTING A FOREX STRATEGY Data on past strategic plans and policies for operations involving non-dollar currencies, and the resulting past forex gains/losses. Forecasts of purchases and sales in non-dollar currencies over the next three years. Forecasts of financial statements of over the next three years, to indicate the general financial health of the company and the significance of the Forex risk. Forecasting of forex cash flows. Data on the past and expected future volatility of dollar currency rates and interest rates. Data on the CEO/stakeholders attitude to Forex risk taking. Data from financial staff, bankers and consultants on relevant available derivatives. .

d. e. f. g.

6.6 a.

LEARNING POINTS Forex is a key part of RM. Even with EMU (European Monetary Union) in 1997 (or 2097!), there will still be risk between Dollars, Yen, Euros etc. The current trend of "out-sourcing" materials and services internationally, creates Forex risk. when buying or selling foreign currencies or when competitors are doing so.

b.

c.

Natural hedging whereby cash flows are balanced in each currency, and thus no Forex risk exists (but often difficult in practice unless export/import patterns are stable). The forward contract is by far the most commonly used currency hedge. The contract may be to buy or to sell a fixed amount of foreign currency at a fixed price and a fixed future delivery date. With the Money Market hedge, buy foreign currency for dollars, on the spot market on July 8, investing the currency until the payable is due on October 8. The currency investment must financed in dollars (driven by the same interest differential as the forward rate). . Future are standardized forward contracts traded officially on an exchange. Options are rights to buy (call) or sell (put) an amount of another currency (commodity/interest rate) at a fixed exchange rate or price. The option buyer has no legal obligation to buy or sell, just the chance of doing so! The choice of Forex strategy may depend in large part on company's competitive position. A "Lock-in EVERYTHING policy" not followed by competitors could be put us at a competitive disadvantage if a currency moves in the "wrong" direction.

d.

e.

f. g.

h.

i.Careful analysis of current and future risks, is critical to the decision as to how different hedging tools (natural, forward, money market, future, no-hedge, options/swaps) can best be applied. So much depends upon reliable financial and cash flow forecasts. j.In 2005, all operating managers have a role to play in efficient and effective RM and decision-making.

6.7 insert

LEARNING PATTERNS

6.8 (a) (b) (c) (d) (e)

INSTRUCTIONS Re-assemble in CSG Study carefully the lecture on the case Record key learning points in your notebook Discuss outstanding questions When the bell rings it is time for lunch

ASSIGNMENT 10.0 - LECTURE ON MERRILL B 2 10.1 FOREX PROBLEMS a. Key problems are: 1 2. 3. 4. b. What is really at risk? If there really is a risk of loss from fluctuating currencies, what should be done about it? What instruments are appropriate to manage this risk? How do the foreign exchange markets function, and what is their relation to the financial markets?

The B1 case discussed Forex instruments. The B2 case deals with Forex operations and strategy.

10.2

BANK FORWARD EXCHANGE RATES, CURRENCY FUTURES AND OPTION PRICES a. Forward exchange rates and futures prices are a function of the current spot exchange rate, and the interest rates for the two currencies. They represent the equilibrium situation where [a bank] holding Yen has equivalent risk and return by either a yen or a dollar time deposit. Futures prices are determined by the market and the carrying cost. See exhibit for computation. Option prices are a function of: 1. 2. 3. 4. Relative interest rates between the two currencies, Strike price relative to the forward exchange rate, Time to maturity, and Expected volatility of the future spot exchange rate. Option pricing models have been developed to help price these instruments.

b. c.

10.3

TIME OF HEDGING a. b. Merrill is a small organization. The risk that shareholders and management would accept can be easily determined. The Forex strategy depends on the competitive position. If Merrill used lock-in rates with forwards, futures, or money market hedges but competitors do not, it could be put to a competitive disadvantage if the Yen weakens. Four timing alternatives in hedging: a. When Orders are Placed Appropriate if final selling prices cannot be changed to offset the effect of an increase in the yen, e.g., price lists or catalogs are published before the time of placing the order. Assumes that suppliers delivered more or less on time so that hedges would not have to modified. b. When Invoiced Appropriate if selling prices were based on a margin over suppliers' invoice prices. Assumes that competitors used a similar hedging strategy; otherwise Merrill might be at a cost disadvantage with rising Yen exchange rates. c. For the Entire Year Based on Budgets Hedging of future expected yen payments done at budget time. Assumes ability to forecast purchases from Japanese suppliers with accuracy to avoid excessive mismatching between exposures and hedges. Requires a "VIEW" of whether the yen was over- or under-valued. May lock-in to a high yen rate at budget time which weakens during the year. d. Leave Positions Unhedged - as discussed below

c.

10.4

UNHEDGED FOREX EXPOSURE a. This is what Merrill has been doing - mainly by default. Over the long term, this strategy may produce about the same results as one that hedged all exposures systematically with forwards or futures or in the money market. Leads to higher cash flow volatility, and possible serious financial problems with rising Yen rates. In larger organizations where managers often move periodically, their interests may not always coincide with those of the shareholders. Manager with currency risk responsibility for only three years, may avoid a strategy of unhedged exposure, because it could produce a string of losses during that time span. The manager's performance appraisal would suffer from his or her "bad" luck. This is an example of agency cost. Shareholders may not be aware of this strategy, and not properly take this risk into account in valuing the company. The amounts at risk would have to be fairly stable otherwise this strategy could lead to currency losses being suffered from large exposures and gains enjoyed with small exposures. There may be situations where a currency is so mis-valued that the risk of loss is low [U.S. dollar in 1985? Sterling, Peseta, Mark in 1992?]. Still, even under these conditions, to avoid being accused of gambling, leaving positions unhedged is difficult to defend. A "calculated" risk that would be obtained by using options to hedge seems to be more appropriate. g. Thus both risky under-hedging and costly over-hedging may be problems.

b. c.

d. e.

f.

10.5

FOREX PROFIT MAKING a. This is a basic policy decision and is related to how risk is perceived and valued by the management of a company, its shareholders, and other interest groups. A rather conventional view on this holds that in a non-financial company, management [should] understand their primary business - providing services, manufacturing and marketing a product, etc. There is a given level of business risk associated with this primary activity. To make money from managing currencies requires a different type of expertise that few non-financial firms possess. Therefore, they should play it safe and hedge currency risk. A number of large organizations have been able to put together enough highly skilled people to be successful; but even here, there are plenty of examples of important losses being incurred. A well documented case is Allied-Lyons which lost some , 150 million. A few companies operate a modest "slush fund" where the financial managers are allowed a limited amount of capital to take risky currency positions. Alternative views on "taking a position": 1. it is essentially gambling, the rationale is that an effective management team needs to keep its skills finely honed; actually taking positions in the market is the best way to do this.

b.

c.

d.

2. Takes less skill that hedging exposure. Gambling tends to foster shortterm view \ s a "long term" view is market

10.6

FOREX PROFIT CENTERS a. Some companies do set up the finance or treasury function as a profit center. This requires the necessary investment to be made in equipment and management skills, and an adequate system of controls installed to monitor the operation. One of the many issues that arise is how to define an adequate level of performance: how much profit for how much risk? Profit is easier to measure than risk in this exercise. And risk is not limited to guessing wrong on how the currency moves. It also involves the possibility of fraud. There is plenty of scope for further discussion of these issues.

b.

c.

10,7

REVISED FOREX STRATEGY FOR THE FUTURE a. Suggested strategy based on financial forecasts for three years ahead and detailed forecast of yen purchases for one year ahead, to develop a strategic approach: 1. 2. 3. b. Make quarterly forward contracts for funds at risk. Buy longer term call options where dollar/yen volatility makes forecasting difficult. Review forex gains/losses monthly.

Justification: 1. 2. 3. 4. 5. Yen purchases are now very significant (over 50% of total). Hedging every purchase order would incur excessive agency cost. Options can protect the company from excessive volatility. Swaps and exotic options are not appropriate for this situation/management. Forex must not be not speculation but basic policy decision-making related to how risk is perceived and valued by the management of a company, its shareholders, and other interest groups.

10.8

LEARNING POINTS a. b. Buying foreign currency "Futures" to fix in advance the effective foreign currency exchange rate on the payable. With the option contract the buyer pays a premium to the writer (seller) of the option, for the "right" but not the "obligation" to buy (call - "long") or sell (put - "short") the foreign currency. A forex swap (only 5% of the swap market!!!) can change the maturity of a transaction while retaining the coverage against risk. e.g. spot sale of a currency against a different currency and simultaneous forward repurchase or the other way around. A forex swap is similar to multiple forward contracts. Lock-in of all risks with forward or futures would be costly. Forward rates are not speculative calculations. They are a mathematical function of spot exchange rates and the differential interest rates between the two currencies for the time horizons 30, 60, 90, 180 days: Shortening or prolonging a hedge over time, may not always be costly if the exchange rate move unfavorably. Forex must not be not gambling. Leaving positions unhedged must be a decision which can be justified, not just a default. Forex strategy must relate to how risk is perceived and valued by the management of a company, its shareholders, and other interest groups. Graphical diagrams can communicate effects of complex derivatives on cash flow and profit/loss.

c.

d. e.

f. g. h.

i.

10.9

LEARNING PATTERNS insert

10.10

INSTRUCTIONS (10 minutes) (a) (b) (c) (d) (e) Re-assemble in CSG Study carefully the lecture on the case Record key learning points in your notebook Discuss outstanding questions When the bell rings it is time for lunch

ASSIGNMENT 5.0 LECTURE - CASE SCA 5.1 WHAT ARE THE KEY FACTS OF THE CASE AND THE RANGE OF PROBLEMS TO BE RESOLVED? a. b. c. d. e. Swiss Airline must invest about SF 9 millions in new equipment. Two potential suppliers (USA quoting $7.5 millions and UK quoting pounds 4,95 million). Spot rates indicate about the same cost in SF. Payment not due for a year. SF interest rates below USA/UK rates and thus forward rates are at a premium. Company business highly dependent upon dollar/SF rates. Problems involve: choice of suppliers, risk hedging and managerial responsibility.

5.2

WHICH SUPPLIER OFFERS THE BEST PRICE? Payment due in one year based upon forward rates would be: USA $7,500,000 @ 1.1826 equals SF 8,870,000 UK pounds 4,95,000 @ 1.17902 equals SF 8,860,000 Note: The UK supplier also quoted SF 8.900,000 which must have included a little premium for the trouble of quoting in SF!

5.3

WHAT ARE THE RM ALTERNATIVES FOR HEDGING FOREX RISK? a. b. Leave the position un-hedged (with possible risk) Hedge with forward rates (which eliminate all forex risk, but allow an "opportunity loss" if the SF exchange rates make dollar or pounds less expensive).

cb. Hedge with futures if the amounts and maturity dates are suitable (no great advantage over forwards). c. d. Hedge with options (which may involves a high cost and yet not be "in the money"). Hedge with some "exotic".

5.4

DOES THE GENERAL BUSINESS RELIANCE DOLLAR/SF RATE AFFECT THE DECISION? a.

ON

THE

Yes, because a rise in the dollar will bring more dollar cash flow. Conversely a fall in the dollar will bring reduced cash flow. Thus a USA purchase in dollars may allow a "natural" hedging of dollar cash receipts and a payments. If SCA was not dollar dependent then hedging the risk would be critical.

b. c.

5.5

WHO SHOULD BE RESPONSIBLE FOR THIS RM DECISION? UNDER WHAT GUIDELINES? a. b. c. CEO must provide RM guidelines which set the limits to the authority of managers to commit the company. This amount is "material" and thus probably above the Treasurer's authority. Purchasing manager and Treasurer must jointly submit a proposal for CEO approval.

5.6

DECIDE AND JUSTIFY WHAT SHOULD BE DONE a. Decision: 1. 2. 3. 4. Make joint decision with treasurer, purchasing manager and CEO. Buy from the USA supplier. Do not hedge with forwards, futures or options. - allow "natural hedging" to reduce the risk. Review the situation monthly to allow for possible specific hedging if necessary.

b.

Justification: 1. 2. 3. 4. Company's functional currency is not the SF but the US dollar. Purchases in USA are covered by the "natural hedging" of dollar cash flows, thus reducing risk. Cost of hedging instruments is thus avoided. Exotic options may not be justified for an airline company.

5.7

LEARNING POINTS a. b. CEO must set RM guidelines to limit the other managers authority to commit the company to high risk. The Treasurer can provide RM expertise but needs valid forecast data from operating managers for effective RM activities. Decisions on major international purchases require participation of purchasing manager, treasurer and CEO.

c.

d. Suppliers who quote in foreign currency may be simply adjusting with forward rates and

e. f. g. h.

Forex forward rates are at a premium when SF interest rates are lower than dollar/pound rates. Forward prices are simply spot plus differential interest rate computations. Hedging with forwards is not always justified. Hedging alternatives are: forwards, futures and options and "exotic instruments", but "natural hedging" may be best. When the dollar is the "functional currency" then balancing cash receipts and payments may provide "natural hedging" at the lowest risk and cost. Operating managers who understand RM concepts can help the Treasurer to make good RM decisions.

i.

5.8

LEARNING PATTERNS

5.9 (a) (b) (c) (d) (e)

INSTRUCTIONS Re-assemble in CSG Study carefully the lecture on the case Record key learning points in your notebook Discuss outstanding questions When the bell rings it is time for lunch

ASSIGNMENT 10.0 LECTURE - CASE C3

10.1 WHAT IS THE STORY OF THE CASE AND WHAT THE KEY FACTORS? a. b. c. Company undergoing strategic change with sale of an old plant in the Boston for concentration of production in Atlanta. Treasurer will receive $25 million from the Boston sale, for 180 day investment until needed for Atlanta investment. Short term interest rate currently 5% from Eurodollar deposit. Interest rate may decline within 30 days and before cash is available for investment. Failure to lock in the 5% rate would mean an "opportunity loss" for the company. But what if they go up? Treasurer with several alternatives, does not want to be accused of gambling (unsuccessfully!). ARE AVAILABLE? WITH WHAT

d. e.

10.2 WHAT ALTERNATIVES CONSEQUENCES? a. b. c.

Do nothing until cash actually received - opportunity loss if rates go down. Place the funds for less than 180 days and roll forward opportunity loss if rates go down and gain if they go up. Take a "long" (opportunity to buy) position with a futures contract in 180 day Eurodollar Deposits or US Treasury Bills which have a delivery date in about 30 days time - if interest rates fall within 30 days, the market value of these instruments will rise and with the future the company buys them below market price - thus ensuring the 5% return for 180 days. Negotiate an FRA with the bank to take effect in 30 days when the money is deposited - this will guarantee an interest directly related to LIBOR - company will receive interest up to the agreed rate or pay over any excess. - thus ensuring the 5% return for 180 days.

d.

10.3 WHAT ARE THE CRITERIA FOR THE TREASURERS DECISION? a. b. c. d. e. Level of RM understanding by the, Treasurer, CEO and operating managers in the company - to avoid the charge of gambling. RM guidelines issued to limit the Treasurer's freedom to negotiate RM contracts. Significance tot eh company of the opportunity loss of failing to take RM action if interest rates fall. Cost and rates of futures contracts compared with FRA which may be customized to particular company needs. Other short term company cash needs for which the sales proceeds should be better invested (overdraft reduction etc.).

10.4 SHOULD A SEPARATE TREASURY/RM UNIT BE SET UP WITHIN THE COMPANY TO HANDLE THE WHOLE RANGE OF PROBLEMS (NETTING, FINANCING, FOREX, INTEREST, COMMODITIES, EQUITIES)? SHOULD SUCH RM UNIT BE A PROFIT CENTER? a. Yes, for groups and large companies - if it has the high level of staffing, equipment and information systems required for a professional operation. If not, then use financial consultants - not banks (who may have other priorities). No, (if it is a profit center) because this would motivate unnecessary speculation which is most difficult to audit and control; and it could provoke significant losses, even endangering the survival of the company.

b.

10.5 HELP THE TREASURER TO DECIDE AND JUSTIFY HIS ACTIONS. a. Decisions: 1. Research the cost of a "long" position in market for Eurodollar Deposits/US Treasury Bills 180 day futures, with delivery 30 days from now. 2. Motivate the bank to meet the futures costs and settle with a FRA. b. Justification: 1. The investment is significant and thus RM must be employed. 2. Interest rate fall would incur serious opportunity loss which can be avoided. 3. FRA bank facility is quick and easy, provided it marches the cost of alternative RM. 10.6 LEARNING POINTS a. b. c. d. e. Failure to gain adequate interest on cash holdings is an opportunity loss. Rolling over deposits monthly is only profitable when interest rates are rising. When interest rates fall the market value of interest sensitive instruments (Eurodollar Deposits/US Treasury Bills) rise. RM can avoid opportunity losses when interest rates fall. FRA (Forward Rate Agreement) with the bank can be based on LIBOR interest rate levels whereby the bank guarantees a minimum rate and the depositor refunds any excess above this rate, to the bank. They may be customized to special amounts and times to fit company needs. Groups and large companies may need an RM Unit to explore the potential for RM in forex, interest, commodities and equities. An RM Unit which is a profit center may be motivated towards RM speculation, which is hard to audit and control. and could endanger company survival. Treasury management of cash depends upon good forecasts from operating managers on the timing of future cash flows.

f. g.

h.

10.8 LEARNING PATTERNS

10.9 INSTRUCTIONS (a) (b) (c) (d) (e) Re-assemble in CSG Study carefully the lecture on the case Record key learning points in your notebook Discuss outstanding questions When the bell rings it is time for lunch

FOREX DRAFT/

AUTOMATED GROUP LEARNING (AGL)

ROUGH DRAFT
NO. 11 - FOREX & RISK MANAGEMENT FOR NON-FINANCIAL MANAGERS

DAILY WORK PACK - PART I (Retained)

Copyright: LR/RGAB 2006/1 No copies of without written permission.

INTRODUCTION

WELCOME TO THE PROGRAM 1.Good morning. Welcome to AGL No. 11 Forex & Risk Management for Nonfinancial Managers - 2006. AGL - Automated group learning. 2.During the next two days you will achieve a rapid grasp of the basics of business strategy for EVERY level of the organization. 3.The AGL learning system represents many years of development and testing in thirty countries around the world, in several languages by thousands of participants. Their criticisms and suggestions have been incorporated into the program. 4.After two days learning with the AGL method you will understand and use the Forex and Risk Management and how to apply them to your organization; and you will retain the skills and knowledge accumulated for a long period. 5.While you may be used to traditional educational methods, you will be agreeably surprised by your learning results of the next two days. We will provide you with a controlled environment for learning. 6.It may seem strange for you to learn without an instructor, but be assured that we have structured the course to enable you to find the answers to all your questions in the learning materials provided. 7.Your course organizer is trained to run the program and to help you obtain the most benefit from the course. You will have to work hard, but you will learn a great deal, and to retain the knowledge. So now let us start with some abbreviations which follow ... AGL - AUTOMATED GROUP LEARNING IND - INDIVIDUAL SG - SMALL GROUP CSG - COMBINED SMALL GROUP MG - MAIN GROUP

L - LECTURE D - DISCUSSION LRT - LEARNING RECALL TAPE *** - STOP! DO NOT LOOK PAST THIS PAGE UNTIL ASKED TO DO

PROGRAM - PART I VERSION A - 2 1/2 DAYS - STARTING IN THE MORNING ActivityGroupDay I INTRODUCTION: 1.Introduction SG (new) 2.Quiz UNIT I: 3. 4. 5. STUDY: Forex Lecture: Case: ISG MG IND A-1SG CSG MG A-1CSG 09.45 - 10.30 Coffee 10.45 - 11.15 11.15 - 12.45 Lunch 13.45 - 14.15 IND IND0 SG 09.00 - 09.15 9.15 - 09.45

6.Lecture UNIT II: 7.Study: Forex II 8.Lecture 9.Case: Preparation for Day II Day II -Case 10.Lecture 11.Summary Lecture

IND SG (new) MG IND A-2SG IND

14.15 - 15.15 Tea 15.30 - 16.00 16.00 - 1700

20.00 - 21.00

CSG MG CSG MG

0.90 - 09.45 09.45 - 10.15 Coffee 10.15 - 11.15

PROGRAM - PART I VERSION B - 2 DAYS - STARTING IN THE MORNING Activity INTRODUCTION: 1.Introduction 2. Quiz IND SG (new) IND SG 08.00 -08.30 08.30 - 09.00 Group Day I

UNIT I: 3. 4. 5. Study: Forex I Lecture Case: IND MG SG IND A-1SG CSG MG CSG 09.00 - 10.15 10.15 - 10.30 Coffee 10.45 - 12.00

6.Lecture UNIT II: 7.Study: Forex II 8.Lecture 9.Case: -Case 10.Lecture 11.Summary Lecture Preparation for Day II

12.00 - 12.30 Lunch 13.30 - 14.45 14.45 - 15.00 15.00 - 15.45 Tea 16.00 - 16.45 16.45 - 17.15 CSG 17.15 - 18.00

IND SG (new) MG IND A-2 SG CSG MG MG IND SG

20.00 - 22,00

ASSIGNMENT 1.0 - INTRODUCTION (30 MINUTES) 1.1SPECIFIC OBJECTIVES The program is designed to provide managers with the opportunity to achieve a deeper understanding of the new Forex and Risk Management concepts, terminology, techniques and statements. This broadening of knowledge, skills and attitudes, will enable them to capitalise on new business opportunities and to accelerate their professional development. The specific learning objectives are to: a.Recognize and use FOREX and RM language and concepts b.Analyze FOREX operational and strategic issues. c.Relate RM concepts to current and future business opportunities. d.Develop confidence in participating in RM management decision-making. e.Motivate further study in the future The syllabus of the program includes: FOREX language and concepts, hedges, forward rates, futures, options, swaps, markets, RM concepts and issues related to business strategy.

1.2AUTOMATED GROUP LEARNING (AGL) The AGL method is designed to achieve rapid individual learning using special material and the stimulus of group activity without a formal teaching. The groups use the material to find the answers to all problems and questions. The program provides the full cycle of pre-learning, learning and learning maintennce activity. 1.3GROUP ARRANGEMENTS The work will be done: a.IND -Individually, or b. SG - Small Group (in small groups of four members which will change daily), or c.CSG - Combined Small Group (two small groups together), or d.MG - Main Group (for short taped lectures on key learning points with visual aids).

1.4SG - SMALL GROUPS Group names provided on name lists. Note the name of your SG and the names of the other members. 1.5 LEARNING MATERIALS a.Retained by members Notebook - for recording every key point Workpack for Day I with study notes, cases and exercises. Standard course diary Glossary CAI Learning recall tape b.Used by not retained by members: Guide - with quiz, case solutions and key learning points NOTE: Please use your notebook. You receive all the materials in your SG. Please don't look ahead in the work pack until you are specifically asked to do so! 1.6METHOD Try to complete every task in the time allowed. A pattern of learning methods will be used including: a.Study b. Case analysis c. Lectures d.Quizzes e.Learning patterns f.Exercises/minicases g.Homework reading h.Learning Recall (LRT) i.CAI NOTE: There will be a flip chart in then room for you to record CONTINUALLY any suggestions for correcting the learning materials and improving the quality of the learning environment. This helps you to remove "Learning Blocks". Please use this facility to express your ideas ...

1.7LEARNING PATTERNS INSERT

1.8INSTRUCTIONS (15 MINUTES) a.Assemble in SG's to introduce yourself, indicate your past experience in finance and what you hope to contribute to and gain from the course. b.Complete the registration sheet in the Daily Course Diary. NOTE:Please check that you have a full set of learning materials now.

ASSIGNMENT 2.0 - QUIZ (45 MINUTES) 2.1INSTRUCTIONS SMALL GROUP WORK (a)Assemble in SG (b)Answer the quiz of 70 questions; mark your answers a, b, c, or d with a clear "x" on the special form provided in the course diary (c)Work as quickly as possible but don't guess - leave blanks (d)Hand in your answer sheet to the Organizer who will mark it and give you a quantitative measure of your strategic knowledge at the start of the course (e)Reassemble in MG when the bell rings

UNIT I - FOREX I

ASSIGNMENT 3.0 - FOREX I - STUDY (60 MINUTES) 3.1INSTRUCTIONS - INDIVIDUAL/SG WORK (a)Assemble in SG (b)Read the lecture and discuss every issue in SG. (c)Record the seven most significant issues on the flip chart provided. (d)Reassemble in MG when the bell rings

NOTE: Work very quickly. Please use your notebook to record key points and also MARK UP the Daily Work Pack as a LEARNING TOOL FOR YOUR SPECIAL NEEDS. Don't look ahead in the workpack until you are specifically asked to do so!

ASSIGNMENT 4.0 - LECTURE ON VIEW AND VISION 4.1METHOD Read aloud, listen and respond verbally to any questions. 4.2RISK MANAGEMENT (RM) CHALLENGES a.In 1996 every large business is exposd to "international risk" from suppliers, customers or competitors, and needs "Risk Management" (RM). Low earnings can no longer be blamed on "currency/interest fluctuations" which could have been avoided. b.RM tools are now available to "hedge" changes in foreign exchange rates, interest rates, commodity prices and equity valuations. Thus current and future risks of lower earnings, cash flow and credit ratings can be "hedged" (insured against). c.RM may be defined as: the ability to identify, measure and assess the limits of acceptable financial risk, which an organization may, at reasonable cost, defray or reduce, using available market instruments. d.For efficient and effective RM, both financial and all non-financial operating managers need to "own the risks" and to be involved in RM decisionmaking. e.With the high risk of change in foreign exchange markets (volatility) which could wipe out "normal" business profits, operating business managers now need some basic understanding of: foreign exchange rates, currency and interest fluctuations, hedging and the currency market information appearing in the financial press (read the WSJ daily or The Economist weekly?). 4.3SPECIFIC FOREX ISSUES a.FOREX is a key part of RM. Even with EMU (European Monetary Union) in 1997 (or 2097!), there will still be FOREX risk between Dollars, Yen, Euros etc. b.The current trend of "out-sourcing" materials and services internationally, creates FOREX risk. when buying or selling foreign currencies or when competitors are doing so. c.The key FOREX issues facing industry, commerce, exporters, importers, and others active in international trade are: 1.Identifying the source of the risk. 2.Analyzing the risk. 3.Selcting and appropriate FOREX strategy. 4.Managing the strategy.

d.There is a need to assess the nature, size and "time horizon" of all "material" (significant) currency risks which may be: 1.Transaction risks - purchase and sales cash flows 2.Translation risks - incorporating foreign assets, liabilities, costs and revenues into the holding company annual reporting, so as to protect the credit rating and earnings flow. 3.Economic or strategic risks - competitive advantages in local and international markets, both currently and in the future, 4.Contingent risks - arising from current commercial activity (e.g.tendering for a contract overseas) which may have an exposure, only if successful. 4.4FOREX TERMINOLOGY a.The financial press publishes complex reports of FOREX daily using a special terminology (read WSJ daily). b.Basic FOREX terms (see glossary) are: 1.Spot transaction - foreign exchange transaction in which the settlement of the delivery obligation usually takes place 2 business days after the deal was concluded. 2.Cross rate - calculated foreign exchange rate from two separate quotations containing the same currency. Example SF/$ 1.20 and DM/$ 1.49 result in a cross rate of DM/SF 1.20/1.49 = DM 0.80/SF (figures simplified). 3.Hedging - transaction to fix the outcome and thus reduce risk of loss due to price or rate changes in currency, money market or commodity trading (like insurance). These are not speculative transactions but covers to fix a specific rate or price level or range. 4.Forward contract - foreign exchange or precious metal or interest rates, or commodities or swap transactions, where the delivery obligations of both parties are fulfilled some 30-180 business days after the deal is arranged. 5.Future - standardized forward contracts traded officially on an exchange. 6.Option - right to buy (call) or sell (put) an amount of another currency at a fixed exchange rate or price. Many complex (almost "exotic") put/call combinations now available. 9.Swap - changing the maturity of a transaction while retaining the coverage against risk. Spot sale of a currency against a different currency and simultaneous forward repurchase, at an agreed price and delivery date.

4.5HEDGING a.Hedging is the technique for reducing the risk of FOREX losses which could "materially" affect the normal manufacturing/trading profit. b.There are four basic hedging alternatives: 1.Natural hedging whereby cash flows are balanced in each currency, and thus no FOREX risk exists. 2.Lock-in the future exchange rate now with a: a.Forward contract b.Money market deal c.Futures contract 3.Leave the position open - do not hedge; this may sometimes be dangerous with an almost unlimited loss potential. 4.Hedge with a series of "options" or "swaps" at the "downside", but leave the "upside" open for possible profit. c.Alternatives 3 and 4 are only relevant if, the manager has a "VIEW" i.e a strong belief that future rates will move favorably. Otherwise it is gambling!

4.6HEDGING WITH FORWARD CONTRACTS a.The forward contract is by far the most commonly used currency hedge. The contract may be to buy (call) or to sell (put) a fixed amount of foreign currency at a fixed price and a fixed future delivery date. b.A typical problem is what to do on July 8 when you expect to pay a supplier Yen 225 M on October 8. c.See Annex 1 for a three-month forward contract (call) entered into on 8 July to buy 225 million for delivery on 8 October would cost $2,127,000 million at the forward rate of 105.75 per dollar (225 M X 105.75 = $2,127,000). d.No effect on cash until maturity (October 8) when dollars are paid and yen received]. The dollar price is settled on July 8. Whatever the future spot exchange rate, the contract guarantees the rate, but the bank may require some collateral - say 10 %.

4.7HEDGING WITH THE MONEY MARKET a.With the Money Market hedge, buy foreign currency for dollars, on the spot market on July 8, investing the currency until the payable is due on October 8. The currency investment must financed in dollars. c.The money market hedge may be sometimes be cheaper than the forward contract when better differential interest rates are available. d.See Annex 1 for the detailed computation at a cost of $2,101,000. The money market hedge expands the assets and liabilities in the balance sheet and may use up credit lines.

4.8WHEN TO HEDGE a.Need to define the amount of FOREX risk that shareholders and management are prepared to accept. b.The choice of FOREX strategy may depend in large part on company's competitive position. A "Lock-in EVERYTHING policy" not followed by competitors could be put us at a competitive disadvantage if a currency moves in the "wrong" direction. c.There are four approaches to hedging currency risk on new supplier contract: 1.When order is being quoted for 2.When order is placed 3.When order invoiced 4.When setting the budget for the year. d.Leaving positions unhedged as a deliberate strategy, may in long term produce about the same results as hedging. However, may allow higher cash flow volatility, and result in serious losses with of rising rates.

4.9OVERALL a.In 1996 every large business with international suppliers, customers or competitors has a need for some RM of which FOREX is a part. Low earnings can no longer be blamed on "currency/interest fluctuations" which could have been hedged". b.The many FOREX risks: transaction, translation, economic/strategic and contingency, raise a whole range of problems for protecting the financial health and survival of the business. c.Careful analysis of current and future risks, is critical to the decision as to how different FOREX hedging tools (natural, forward, money market, future, no-hedge, options/swaps) can best be applied. So much depends upon reliable cash flow forecasts. d.Critical questions are: 1.What is the "functional currency" to be protected by hedging i,e dollars, pounds, Yen? 2.What is the limit to the time horizon for hedging i,e, how many years ahead? 3.Should we hedge for contingency future commitments now, before there is any legal obligation? 4.In "hedging" should an industrial, trading, or service company, try to make money on currency movements? 5.Should the FOREX finance function in a company be set up as a profit center? How to control it and thus prevent gambling that damages the company (Allied Lyons)? e.In 1996, all operating managers have a role to play in efficient and effective RM and FOREX decision-making.

Annex 1 - Detailed Computations - Comparison of Hedging Methods for Payment of Y 225 million in 90 days on October 8 1. Forward Contract Hedge: Method: Buy (call) on 8 July Yen 225 M @ Yen 105.75/$ (.095/100 yen) for delivery on 8 October. Pay later. Total cost in Dollars on 8 October: yen 225,000,000/105.75 = $2,127,000 2.Money Market Hedge: Method: Borrow dollars on 8 July for 90 days to 8 October; buy yen spot on 8 July and invest for 90 days until 8 October. Cost in Dollars on 8 October: a.Compute yen interest rate (0.53% p.a.) for 90 days: .53 X 90/360 =.1325% b.Compute yen needed to produce 225M (in capital plus interest) in 90 days: 225,000,000/100.1325 = yen 222,057,000 c.Compute cost to buy enough spot Yen on 8 July (yen 107.08/$): 222,057,000/107.08 = $2,073,000 d.Borrow $2,073,000 on 8 July for 90 days @ 5.35% p.a. and pay interest: 2.073,000 X (5.35 X 90/360)/100 = $28,000 e.Total cost in Dollars on 8 October: $2,073,000 plus interest $28,000 = $2,101,000 Note: Implicit forward rate using the Money Market, may be computed as yen 225,000,000/$2,101,000 = yen 107.09/$. Actual forward exchange rate was Yen 105.75/$. 3.Futures Hedge - to follow. 4.Option/Swap Hedge - to follow.

4.10LEARNING PATTERNS 1.FIRST very briefly SCAN the learning patterns which follow. 2.THEN study each pattern very carefully. Think very CREATIVELY to DIRECTLY relate the old and new IDEAS to your ORGANIZATION ... try to "HOOK" the new learning into your past EXPERIENCE, IDEAS and PERCEPTIONS ... 3.NOTE that the patterns have been specially designed to STIMULATE both conscious non-conscious learning ... can you make them work for you?

4.11INSTRUCTIONS (10 MINUTES) (a)Reassemble in SG. (b)Study the lecture very carefully and record key points in your notebook. (c)Discuss any outstanding questions in SG. (d)When the bell rings carry on with the case study which follows.

ASSIGNMENT 5.0 CASE STUDY - A1 (75 MINUTES) 5.1INSTRUCTIONS a.General: A1 - is a case study; it is the story of a business in words and figures; the questions are to help you to analyze the problems. b.Individual and SG work (45 minutes) Read the case and study it carefully. Analyze all the key problems. Answer all the questions in your notebook and on the SG flip chart provided. Discuss all the points together and formulate a specific plan of action; you need not all agree but you must decide. c.Combined small group work (30 minutes) Groups will assemble as follows: A+D B+E C+F Groups A, B and C will present the answers to all of the questions on the SG flip chart; they should try to achieve a consensus of the CSG on what has happened and what should be done. d.Re-assemble in MG when the bell rings.

EXHIBIT 1 A1 QUESTIONS ON THE CASE 1.What is the story of the case? Identify the key FOREX issues. 2.What hedging methods are available? Do they require a "VIew"? What has happened to the Dollar/Yen view in recent years? 3.Compare the hedging alternatives: lock-in (forward contract, money market and currency futures) with options. 4.How are bank forward exchange rates, currency futures and options prices determined in the market? 5.What happens if the company hedges a particular exposure, but finds subsequently that the period at risk changes [the exposure is shorter or longer than the hedge]? 6.What does you suggest for an initial FOREX strategy?

EXHIBIT 2 A1 INSERT CASE ***

UNIT II - FOREX II

ASSIGNMENT 7.0 - FOREX II - STUDY (75 MINUTES) 7.1INSTRUCTIONS - INDIVIDUAL/SG WORK (a)Reassemble in new SG (b)Read the lecture and discuss every issue in SG. (c)Record seven significant points on the flip chart provided. (d)Reassemble in MG when the bell rings

ASSIGNMENT 8.0 - LECTURE - FOREX II 8.1METHOD Read aloud, listen and respond verbally to any questions. 8.2CONTINUING WITH FOREX a.In 1996 every large business with international suppliers, customers or competitors has a need for some RM of which FOREX is a part. Low earnings can no longer be blamed on "currency/interest fluctuations" which could have been hedged. b. FOREX tools include: forward, money market, future rates and complex option/swaps.

8.3HEDGING WITH FUTURES a.Buying foreign currency "Futures" to fix in advance the effective foreign currency exchange rate on the payable. b.This is similar to the forward contract, but is not provided by a bank: it comes from a broker trading on a futures exchange - Chicago's IMM or London's LIFFE or Singapore's SIMEX. c.See Annex 2 for the example of paying yen 225 M in 90 days. Buy yen "Futures" in July to create the hedge then sell them back to the market in October, and then buy yen Spot. The profit/loss on the "Futures" position will offset the spot cost at 8 October. Total net cost is $2,117,000. d.Futures are similar to other hedges, EXCEPT: 1.Futures contracts have standard maturities at the middle of March, June, September, and December. 2.The net result of a futures hedge (the gain/loss from the underlying exposure plus the loss/gain from the futures contract) is uncertain, until the "Basis" known in October between futures price and spot rate in October). 3.Few corporate treasurers use futures to hedge currency risks due: basis risk, deposit margin with the broker, revaluation daily ("marked-tomarket"), contracts only for standard size (e.g yen 12.5 million each), and difficulty of understanding and explaining to the CEO, how the hedge works. 4.Futures may be useful alternative to an unfavorable bank rate for a forward contract.

8.4HEDGING WITH OPTIONS/SWAPS a.An option may be used as a single hedge or in series to limit a range of risk. See option types in the glossary.. b.With the option contract the buyer pays a premium to the writer (seller) of the option, for the "right" but not the "obligation" to buy (call - "long") or sell (put - "short") the foreign currency. c.Option quotation are available from the Philadelphia Exchange (on spot currency), and from the Chicago exchange (on futures). Both are generally American type options, i.e., they can be exercised at any time. d. In practice, few exchange traded options are exercised; rather they are sold back to the market prior to expiration. By contrast bank or OTC options are generally European type options, which can only be exercised at maturity. f.The option hedge does not "lock-in" an exchange rate in the same way as the other hedges. It fixes the worst possible outcome - if the option is exercised ("in the money"). h.See Annex 2 for the example of paying yen 225 M in 90 days using a "call" (short) option hedge at a strike price $0.92/100 yen for a premium of $46,000. If the call is exercised (in the money - spot $0.94), Yen would be purchased at the strike price ($0.92) plus the premium, for cost of $2,116,000. If not exercised (out of the money - spot $0.90) the cost would be $2,071,000. i.The option usually costs MORE than the forward contract ($0.95/100 yen), but would benefit from a cheaper yen in October ($0.90) if that occurred. In such a case, holder would either sell the option back to the market if profitable or let it expire. j.Hedging with options can be seen as a form of speculation, not to be used unless the "hedger" has a strong "view" that the currency will move in a favorable direction - a weakening yen in this instance. With no "view" other hedges are better. k.There are many synthetic instruments (combinations of calls and puts and forwards) that could provide alternate risk/return outcomes. See glossary for options such as: average, asian, barrier, box, butterfly, compound, conversion, lookback, spread, straddle, strangle, strap. strip etc. Some these options are constructed by selling a put and buying a call option with the strike prices set so that the cost of the call is more or less covers by the sale of the put. l.In addition to options, a "swap" is a contract between two parties to exchange specified cash flows for some specified future period. The resulting cash flows are determined by reference to agreed interest or foreign exchange rates. A swap can change the maturity of a transaction while retaining the coverage

against FOREX risk. e.g. spot sale of a currency against a different currency and simultaneous forward repurchase or the other way around. A swap is similar to multiple forward contracts.

8.5PRICING OF HEDGES a.Forward rates are not speculative calculations. They are a mathematical function of spot exchange rates and the differential interest rates between the two currencies for the time horizons 30, 60, 90, 180 days: The forward rate is computed: F = S times (1+id)/(I+if) Where: id if = S = Interest rate domestic currency [yen] = Interest rate foreign currency [$] Forward exchange rate [yen per $] = Spot exchange rate [yen per $]

This represents the equilibrium situation where a bank holding yen takes equivalent risk and return by either investing in a yen time deposit at "id" or by buying spot dollars at "S", investing in a dollar time deposit at "if", simultaneously selling forward the principal and interest at "F". Where there are no restrictions on these transactions, arbitrage should cause the above equation to hold. b.Futures prices are determined by models of supply and demand in the futures market, and related by arbitrage to forward rates. h.Option/swap prices are based upon models of the: 1.Differential interest rates between the two currencies, 2.Strike price relative to the forward exchange rate, 3.Time to maturity, and 4.Expected volatility of the future spot exchange rate. 8.6HEDGES TO CHANGE THE TIME HORIZON a.Shortening or prolonging a hedge over time, is NOT costly if the exchange rate move unfavorably. b.The net terminal value is about the same regardless of the movement in the spot exchange rate when forward contract is prolonged, except for certain implicit interest rates used in the forward computation.

c.The maturity of a forward contract may be shortened by using the money market or by taking an offsetting position: Buy forward yen for 90 days delivery. Decide after 60 days that the hedge is not needed. Remove the 90 day hedge by "selling forward" for 30 days the same amount of Yen. Use yen purchased under the first contract to settle the second. The net result is total Forex gain/loss on THREE transactions: the payable, the 1st forward and the 2nd forward. d.Some companies deliberately hedge for a shorter period than the currency exposure, and plan to "roll forward" the hedge at more favorable rates in the future. This is based on a "View" that interest rates will differ; this is "interest rate speculation", NOT currency speculation. 8.7PROFIT FROM FOREX TRADING a.This is a basic policy decision and depends upon how RM is perceived and valued by the management of a company, its shareholders, and other stakeholders (suppliers, banks, workers, community etc.). b.A conventional view is that in a non-financial company, management should understand their primary business (providing services and products) with the given level of business risk associated with this primary activity. c.Key problems are: 1.How to define an adequate level of performance. 2.How much profit for how much risk? 3.How to measure accounting profit/loss in relation to "opportunity cost" and to risk. 4.How is risk affected by poor judgment and possible fraud. d.Many multi-national companies set up a Group FOREX Finance UNit or company as a profit center to manage FOREX for all the subsidiaries in the group; this facilitates "natural hedging". This involves considerable investment in equipment, management skills, control systems, audit and monitoring. e.Managing currencies requires the special skills of FOREX teams. Many are successful; but there are examples of important losses being incurred; a well documented case is Allied-Lyons which lost some 150 million by taking a "view" and selling options which were unprofitable. f.A few companies operate a modest "slush fund" where the financial managers are allowed a limited amount of capital to take risky currency positions, because effective management keep its skills by actually taking positions in the market.

8.8CONTINUING FOREX ISSUES a.Careful analysis of current and future risks, is critical to the decision as to how different FOREX hedging tools (natural, lock-in), no-hedge, options/swaps) can best be applied. b.Complex hedge computations are no substitute for good business judgment and reliable forecasts of cash flows and risk. d.Critical questions are: 1.What is the "functional currency" to be protected by hedging i,e dollars, pounds, yen? 2.What is the limit to the time horizon for hedging i,e, how many years ahead? 3.Should we hedge for contingency future commitments now i.e. before there is any legal obligation? 4.In "hedging" should an industrial, trading, or service company, try to make money on currency movements? 5.Should the FOREX finance function in a company be set up as a profit center? How to control it and thus prevent gambling that damages the company (Allied Lyons)? e.In 1996, all operating managers have a role to play in efficient and effective RM and FOREX decision-making.

Annex 2 - Comparison of Hedging Methods 1. Forward Contract Hedge: Buy (call) 225 M @ yen 105.75 (0.95/100 yen) for delivery on 8 October = $2,127.000. 2. Money Market Hedge: Borrow Dollars on 8 July for 90 days, buy yen spot, invest yen for 90 days to 8 October = $2,101,000 3. Currency Futures Hedge: Buy "18 December" Yen Futures on 8 July @ $0.96 (Contract size: yen 12.5M); Remove hedge (sell "18 December yen Futures" on 8 October. Profit [loss] on hedge compensates for loss [profit] on Yen payable Cost in dollars on 8 October: Buy spot on 8 October Yen 225m @ yen 105.00 = $2,095,000 Buy futures on 8 July @ $0.96/100 yen Sell futures on 8 October @ $0.95/100 yen Result - Loss $0.01/100 yen Total Loss - Yen 225m X $0.01/100 Yen = Net cost $2,117,000 $ 22,500

4.Options Hedge: Buy yen225 M Call Option from Bank with Expiration on 8 october @ Strike Price of $0.92/100 yen (yen 105.70/$) and pay premium of $0.02 per 100 Yen Cost of option hedge is the premium plus its financing until exercised or sold back to the market. Cost $0.0002 X Yen 225m = Financing costs Total cost $45,000 $1,000 $46,0008

If spot rate on 8 October ($0.94) is above $0.92 per 100 yen (108.70 per $]), exercise. Total cost on 8 October: $0.0092 (Yen 108.70/$) X Yen 225m = $2,070,000 Option cost 46,000 Total cost $2,116,000 If spot rate on 8 October ($0.90) is below $0.920 per 100 yen (yen 108.70 per $), do NOT exercise. Total cost on 8 October: $0.0090 (Yen 105/$) X yen 225 M = $2,025,000 Option cost 46,000 Total cost $2,071,000

8.10LEARNING PATTERNS 1.FIRST ...scan ... 2.THEN ... study CREATIVELY ... 3.Can you make them work for you?

8.11INSTRUCTIONS (10 MINUTES) (a)Reassemble in SG (b)Study the lecture carefully (c)Record key points in your notebook (d)Discuss outstanding questions (e)When the bell rings, carry on with the case study which follows

ASSIGNMENT 9.0 - CASE: A2 (90 MINUTES) 9.1INSTRUCTIONS a.In SG study the case carefully and answer all the questions in your notebook and on the SG flipchart (45 minutes) b.Work in CSG as follows: A+E B+F C+D

with groups D, E, F responsible for the CSG discussion (45 minutes) c.Reassemble in MG when the bell rings

EXHIBIT 1 A2 QUESTIONS ON THE CASE

1.Outline your perception of the company's FOREX problems. 2.If an exposure is to be hedged, when should it be done? At the time the order is placed? When the goods are shipped or the invoice is received? Periodically, when budgets or operating plans are prepared? 3.Under what circumstances should an importer leave a foreign currency position unhedged? An exporter? 4.Should an industrial, trading, or service company try to make money on currency movements? Should the finance or treasury function in such companies be set up as a profit center? 5.Suggest and justify a FOREX strategy for the company.

EXHIBIT 2 A2 ***

ASSIGNMENT 11.0 - SUMMARY LECTURE FOR PART 1 11.1OBJECTIVES The specific learning objectives are to: a.Recognize and use FOREX and RM language and concepts b.Analyze FOREX operational and strategic issues. c.Relate RM concepts to current and future business opportunities. d.Develop confidence in participating in RM management decision-making. e.Motivate further study in the future 11.2RISK MANAGEMENT (RM) CHALLENGES a.In 1996 every large business is exposed to "international risk" from suppliers, customers or competitors, and needs RM. b.Risk management (RM) tools are now available to "hedge" changes in foreign exchange rates, interest rates, commodity prices and equity valuations. Thus current and future risks of lower earnings, cash flow and credit ratings can no longer be blamed on "the market"; they can be "hedged" (insured against loss). c.For efficient and effective RM, both financial and all non-financial operating managers need to "own the risks" be involved in RM decision-making. 11.3SPECIFIC FOREX ISSUES a.FOREX is a key part of RM. Even with EMU (European Monetary Union) in 1997 (or 2097!), there will still be FOREX risk between Dollars, Yen, Euros etc. b.The current trend of "out-sourcing" of materials and services internationally, creates FOREX risk. when buying or selling foreign currencies or when competitors are doing so. c.The key FOREX issues facing industry, commerce, exporters, importers, and others active in international trade are: 1.Identifying the source of the risk. 2.Analyzing the risk. 3.Selecting and appropriate FOREX strategy.

4.Managing the strategy. d.There is a need to assess the nature, size and "time horizon" of significant FOREX risks which may be: transaction risks, translation risk, economic risk or strategic risk or contingent risk. 11.4FOREX TERMINOLOGY a.The financial press publishes complex FOREX reports daily, using a special terminology (read WSJ daily). b.Basic FOREX terms are: spot transaction, cross rate, hedging, forward contract, future, option, swap etc. See glossary for more detail.

11.5HEDGING a.Hedging is the technique for reducing the risk of FOREX losses with four basic hedging alternatives: 1.Natural hedging 2.Lock-in the future exchange rate with: a forward, money market deal or future 3.Leave the position open 4.Hedge with a series of options/swaps. 11.6HEDGING WITH FORWARD CONTRACTS a.The forward contract is by far, the most commonly used currency hedge. b.The contract may be to buy (call) or to sell (put) a fixed amount of foreign currency at a fixed price and a fixed future delivery date. No effect on cash until maturity. 11.7HEDGING WITH THE MONEY MARKET a.The money market hedge, buys foreign currency with dollars on the spot market on July 8, invests the currency until the payable is due on October 8. The currency investment must financed. c.The money market hedge may be sometimes be cheaper than a forward contract when better differential interest rates are available. 11.8HEDGING WITH FUTURES a.Buy foreign currency "Futures" to lock-in the effective foreign exchange rate on the payable. b.Similar to a forward contract, but provided only in standard high amounts for standard fixed time periods, by a "Futures Exchange", not a bank. 11.9HEDGING WITH OPTIONS/SWAPS a.An option may be used as a single hedge or in a series to limit the range of risk. Buyer must pay a premium to the writer (seller) of the option, for the "right" but not the "obligation" to buy (call - "long") or sell (put "short") the foreign currency. b. The option hedge fixes the worst possible outcome, when exercised ("in the money"). c.Many synthetic instruments (combinations of calls and puts and forwards) available including: average, asian, barrier, box, butterfly, compound, conversion, lookback, spread, straddle, strangle, strap. strip etc.

d.A "swap" transactions is a contract between two parties to exchange specified cash flows for some specified future period. Similar to multiple forward contracts.

11.10PRICING OF HEDGES a.Forward rates are a mathematical function of spot exchange rates and the differential interest rates for the two currencies for the time horizons 30, 60, 90, 180 days. Prices do not depend on supply and demand. b.Futures prices are determined by models of as a function of supply and demand in the futures market, and related by arbitrage to forward rates. h.Option/swap prices are based upon models as a function of the: relative interest rates, forward exchange rate, time to maturity, and volatility of future spot rates. 11.11WHEN TO HEDGE a.The choice depends on the company's competitive position. c.Four approaches to hedging currency risk on a new supplier contract: 1.When order is being planned 2.When order is placed 2.When order invoiced 3.When setting the budget for the year. 11.12PROFIT FROM FOREX TRADING a.Some multi-national companies set up a "Group FOREX Finance Unit" or company, as a profit center with very careful monitoring of the key problems: 1.How to define an adequate level of performance. 2.How much profit for how much risk? 3.How to measure accounting profit/loss in relation to "opportunity cost" and risk? 4.How is risk affected by poor judgment and possible fraud? 11.13CONTINUING FOREX ISSUES a.Careful analysis of current and critical future risks, is critical to the hedging decision. b.Complex hedge instruments and computations are no substitute for good business judgment, reliable forecasts of cash flows and risks. c.Critical FOREX questions are: 1.What is the "functional currency" to be protected? 2.What time horizon? 3.Should we hedge commitments before legal obligations? 4.Should hedging make a profit? 5.How to control FOREX gambling?

11.14GENERAL RISK MANAGEMENT (RM) CHALLENGES a.RM is the ability to: "Identify, measure and assess limits to acceptable financial risk, which an organization may, at reasonable cost, defray or reduce, using available market instruments" b.RM involves such issues as: 1.How to add value to the business to meet the needs of all stakeholders. 2.How to create and retain profitable customers and recognize the benefits of anticipating change situations. 11.15RISK MANAGEMENT (RM) STRATEGIES a.Four RM alternatives vary from: "complete non-involvement", to "natural hedging" and more sophisticated RM. b.Four steps in financial RM are: 1.Identify exposure risks. 2.Quantify exposure risks. 3.Establish RM strategies and policies. 4.Implement and monitor the RM programs regularly. c.Four requirements for successful RM are: 1.Approval and support of the CEO and board. 2.Acceptance by operating managers to ensure valid forecasts of risk exposure. 3.Relationships with financial institutions. 4.Recognition of the impact of RM on financial reporting, earnings, cash flow and credit rating. 11.16RM WITH OVER/UNDER HEDGING a.In large organizations, where managers move periodically, their RM interests may not always coincide with those of the shareholders. b.With RM responsibility for three years, a strategy of leaving positions unhedged could produce a losses, which may affect the manager's performance appraisals adversely. Hence he may hedge excessively, causing high "Agency cost".

11.17DIFFICULTIES WITH RM a. In 1996, there are basically four risks for which RM has been extensively applied: interest rates, foreign exchange, commodity prices and equity prices. b.Many difficult RM questions arise: 1.What strategy to deal with a strong home currency which seriously effects the company's export sales and earnings? 2.How can RM help to lower the company's cost of capital and make it better able to compete globally? 3.How to "position" the company for future changes in: fixed/floating debt, liquidity, maturity schedules? 4.How to take advantage of expected trends in interest rates? 5.How to deal with current accounting rules that restrict hedging to "booked exposure" and thereby deter RM of the real major economic, strategic and contingent exposures? 6.How to maintain sales margins when the dollar (or functional currency) weakens?

11.18RM ACCOUNTING PROBLEMS a.Accounting rules tend to restrict RM to legal or "booked" exposure The actual economic exposure of the firm may be very different. b.In accounting exposure, accounts are "translated" into financial statements at current rates or a wide variety of other rates, which may materially affect the earnings and credit rating of the company. c.Many alternatives available. Trying to measure effective RM, from the reported FOREX gains and losses, requires very careful analysis, because it ignores "opportunity cost" and there is great scope for "creative accounting".

11.19CURRENT APPLICATION OF RM a.Many large companies use RM to convert fixed to floating debt in "interest rate swaps" and to do extensive FOREX hedging. b.Many resource companies ignore RM in favor of "natural hedging" (balancing exposure flows), with mixed results. c.With global competition and high volatility of interest, currency and equity markets, RM is a growth area for opportunities to protect the key financial risks of assets/liabilities, cash flow. earnings and credit rating. RM is now probably essential for the SURVIVAL of the of EVERY company. e.However, the key to efficient and effective RM is not the increasing complexity of hedging instruments and computations, but rather the increasing cooperation between financial and non-financial operating managers throughout the company. f.In 1996 RM is now a "normal" part of financial management.

11.20LEARNING PATTERNS 1.FIRST ... . 2.THEN ... study .. CREATIVELY ... 3.Could you make them work for you?

11.21INSTRUCTIONS (20 minutes) a.Reassemble in SG b.Review the Summary Lecture for Part I and discuss questions arising c.To get the best out of Part II of the program, try to complete ALL of the following homework tonight: 1.Read the articles on Forex & RM 2.In your diary review the glossary and complete the learning summary sheet for each day with as much useful data as possible, 3.Do the optional exercises in the diary and check the answers 4.Review your notes for Part I of the course and list outstanding questions to be resolved in Part II

Note of appreciation Thank you for working so hard today. We hope the AGL experience is rewarding for you. From tomorrow ... it's downhill all the way ... !! (if you do your all the preparation work)

10.2.96 AGL NO. 11 FOREX & RISK MANAGEMENT FOR NON-FINANCIAL MANAGERS A 2/3 DAY TRAINING PROGRAM FOR MANAGERS & DIRECTORS BRIEF BROCHURE PROGRAM: The program is designed to provide managers and directors with the opportunity to achieve a deeper understanding of the new Forex & Risk Management concepts, terminology, techniques and statements. This broadening of knowledge, skills and attitudes, will enable them to capitalise on new business opportunities and to accelerate their professional development. SPECIFIC OBJECTIVES: The specific learning objectives are to: a.Recognize and use FOREX and RM language and concepts b.Analyze FOREX operational and strategic issues. c.Relate RM concepts to current and future business opportunities. d.Develop confidence in participating in RM management decision-making. e.Motivate further study in the future SYLLABUS: The syllabus of the program includes: FOREX language and concepts, hedges, forward rates, futures, options, swaps, markets, RM concepts and issues related to business strategy. METHOD: The AGL method is designed to achieve rapid individual learning using special material and the stimulus of group activity without formal teaching. The groups use the material to find the answers to all problems and questions. The program provides the full cycle of pre-learning, learning and learning maintenance activity. TIME: Two days or three days. FACULTY: Professor Lee Remmers (INSEAD) and Professpr Andre van de Merwe and Dr. Bob Boland of the European Institute (Geneva). FURTHER INFORMATION: Fax 33-50-40-92-49

Forex DRAFT

AUTOMATED GROUP LEARNING (AGL)

NO. 11 - FOREX & RISK MANAGEMENT FOR NON-FINANCIAL MANAGERS

DAILY WORK PACK - PART II (Retained)

Copyright: RGAB/LR 2006/1 No copies of without written permission.

86 PROGRAM - PART II VERSION A - 2 1/2 DAYS - STARTING IN THE MORNING ActivityGroupDay II UNIT III 1.Review/Quiz 2.Study: RM -1 SG 3.Lecture 4.Case: B1 5.Lecture CSG 6.Case: Bill Brown Case: Bill Brown UNIT IV: 7.Study - Action 8.Lecture RM II Preparation for Day 3 Day III 9.Case: B2 10.Lecture: 11.Quiz 12.Summary Lecture CSG IND MG IND SG CSG 09.00 - 10.30 Coffee MG 10.45 11.30 11.30 - 12.15 12.15 - 13.00 SG (new) IND MG SG IND SG CSG MG IND SG 11.00 - 11.30 11.30 - 12.30 Lunch 13.30 - 14.00 14.00 - 15.15 Tea 15.30 - 16.00 16.00 - 16.15

SG 16.15 16.30

IND SG (new) MG IND

16.30 - 17.00

17.00 - 17.30 SG 20.00 21.00 -

87 PROGRAM - PART II VERSION B - 2 DAYS - STARTING IN THE MORNING ActivityGroupDay II UNIT III: 1.Review/Quiz SG (new) 08.00 - 08.45 2.Study: RM - I IND SG0 MG SG IND SG CSG MG CSG :IND SG

8.45 - 10.00 10.00 - 10.30 Coffee 10.45 - 11.45

3.Lecture 4.Case: B1 5.Lecture 6.Case Bill Brown -Case: Bill Brown UNIT IV: 7.Study - RM II 8.Lecture 9.Case B2 -Case: 10.Lecture: 11.Quiz 12.Summary Lecture

11.45 - 12.15 12.15 - 12.30 Lunch SG 13.30 13.45

IND SG MG SG :IND SG CSG

13.45 - 14.15 14.15 - 14.45 14.45 - 15.30 15.30 - 16.00 Tea MG 16.15 16.45 16.45 - 17.30 17.30 - 18.00

CSG IND MG

88

UNIT IV - RISK MANAGEMENT - I

ASSIGNMENT 1.0 REVIEW AND SHORT QUIZ (30 MINUTES) 1.1INSTRUCTIONS (a)Assemble in new SG (b)Discuss outstanding questions from Part I (c)Do the short quiz which follows. Work on each question individually and then compare answers in SG (d)When all answers have been completed, check with the correct solution and discuss points arising (e)Reassemble in MG when the bell rings

89 ASSIGNMENT 1.0 - SHORT QUIZ - QUESTIONS REVIEW THE KEY LEARNING POINTS IN PART I SECTION 2 AND THEN RESOLVE THE CASE STUDIES WHICH FOLLOW. ALWAYS WRITE DOWN YOUR ANALYSIS AND DECISION - BEFORE YOU LOOK AT OUR ANSWERS. 1.ECONOMIC BLIZZARD COMPANY In January US company forecasts an export sale of 10 million UK pounds of product to a UK customer the following December. Sales are normally stable and do not vary more than 10% each year. Spot rate in January is $1.50/1 pound indicating dollar sales of $15 million. Company decides not to hedge the sale which was booked in November at rate of $1.45/1 pound (sales $14 million). Questions: a.Did the company make a loss? b.Will any loss show in the financial statements? c.Can such economic losses be hedged? 2.SOSNOWSKI CARS The company is a car dealer in the USA that imports German cars (payable in DM) at a time when the dollar is weakening. a.What are the exchange risks of this operation? b.How to hedge the short term customer order risk? c.How to hedge the long term risk? 3.CASE - GSB (USA) CORPN. US Treasurer reports to the CEO: "The forward rate for $/FF is below the spot rate. We must cover our FF receivables because the forward discount shows that the currency is likely to be devalued." Do you agree with this statement? Why? What to do? 4.KHULU CORPN. The US Treasurer finds that the buying rate for U.S. dollars spot in Frankfurt is DM 1.48: a.What would you expect the price of the DM to be in the New York? b.If the DM mark was quoted in New York at $0.68, how would the market react?

90 5.CASE - WHO CORPN. The Treasurer of a French exporter scheduled to receive payment in Italian lira, decides to sell the lira on a 90 day forward contract, so that she knows the FF value of the receivable. a.How will she know the "cost" of this cover? b.When will she know the "opportunity cost? c.What else could she have done? 6.SANCOS COMPANY The DM was quoted at $0.67/DM and the FF was quoted at $0.20/FF in Chicago: a.What are the direct/indirect quotations and the cross rate?: b.What are the incentives for arbitrage, if at the same time Paris was quoting: FF 3.2/DM and FF 4.8/$ 7.WB BANK CORPN. THE bank CEO wishes to prevent its traders from having net "long" (buy) or "short" (sell) positions and swaps in a currency and want to monitor the total future obligations in particular currencies. a.What is a swap? b.How could a foreign exchange trader avoid showing swap positions to his superiors in a bank?

91 ASSIGNMENT 1.0 - ANSWERS TO SHORT QUIZ ANSWERS 1.ECONOMIC BLIZZARD COMPANY In January US company forecasts an export sale of 10 million UK pounds of product to a UK customer the following December. Sales are normally stable and do not vary more than 10% each year. a.Has the company made a loss? Yes the "opportunity loss" in sales is computed: 10,000,000 = $500,000 b.Will any loss show in the financial statements? No. Accountants do not recorded "opportunity losses". c.Can such economic losses be hedged? Yes. Need for the CEO to accept the concept of RM and to agree to provide for economic.strategic and contingent exposure. (1.50-1.45) X

2.SOSNOWSKI CARS The company is a car dealer in the USA that imports German cars (payable in DM) at a time when the dollar is weakening. a.Exchange risks: $/DM rate moves against the dollar leading to higher import purchase not compensated by the seller; $/DM volatility leading to unstable pricing; changes of exchange rates could give competitors a major competitive advantage. b.Hedging short term risk of current customer orders: Alternatives: forward, money market, various options, or natural hedging with another business selling to Germany, or do nothing get supplier to react. c.Hedging long term for future orders: Get supplier to bill in $ or set up long term FOREX forward/option combinations to set the range of acceptable risk.

92 3.GSB (USA) CORPN. US Treasurer reports to the CEO: "The forward rate for $/FF is below the spot rate. We must cover our FF receivables because the forward discount shows that the currency is likely to be devalued." Do you agree with this statement? Why? What to do? a.No. b.Forward rate depends upon the interest differentials and is not a devaluation indicator. c.If the difference is "material" (financially significant) cover with a forward or possibly by "natural" hedging. 4.KhULU CORPN. The US Treasurer finds that the buying rate for U.S. dollars spot in Frankfurt is DM 1.48: The buying rate for dollars spot in Frankfurt is DM 1.48: a.What would you expect the price of the DM to be in the New York? Computed: 1.00/1.48 = $0.67 b.If the German mark were quoted in New York at $0.68 how would the market react? Arbitrage to buy $ for DM in NY, and sell $ for DM in Frankfurt. 5.WHO CORPN. The Treasurer of a French exporter scheduled to receive payment in Italian lira, decides to sell the lira on a 90 day forward contract, so that she knows the FF value of the receivable. a.How will she know the "cost" of this cover? By the forward contract which fixes the rate. b.When will she know the "opportunity cost? Only 90 days later when the FF/Lira spot rate is known. c.What else could she have done? Alternatives: no hedging, natural hedging, money market, options and swaps, which may depend upon her "view" of the FOREX risk.

93 6.SANCOS COMPANY DM at $0.67/DM and the FF quoted at $0.20/FF in Chicago: a.Quotations: $0.67/DM computed as 1.00/.67 = 1.49 DM/$ direct $0.20/FF computed as 1.00/.20 = 5.00 FF/$ direct Cross rate computed as .67/.20 = 3.35 FF/DM b.What are the incentives for arbitrage, if at the same time Paris was quoting: FF 3.2/DM - In Paris buy DM for FF. In NY sell .DM for $ and buy FF for $. FF 4.8/$ - In Paris buy $ for FF. IN NY sell $ for FF.

7.WB CORPN. a.What is a swap? A swap is a contract between two parties to exchange specified cash flows for some specified future period. The resulting cash flows are determined by reference to mutually agreed interest or foreign exchange rates. A swap is thus a series of forward contracts. b.How could a foreign exchange trader avoid showing swap positions to his superiors in a bank? The trader could conceal swaps by separating the forward contracts which should be considered together.

94 ASSIGNMENT 2.0 STUDY - RM - I (60 MINUTES) 2.1INSTRUCTIONS (a)Assemble in SG (b)Read the lecture and discuss every issue in SG. (c)Record the seven most significant issues on the flip chart provided. (d)Reassemble in MG when the bell rings

95 ASSIGNMENT 3.0 - LECTURE - RM - I 3.1GENERAL RISK MANAGEMENT (RM) CHALLENGES a.In 1996 every major business is either directly or indirectly subject to international competition, and has a need for RM of which FOREX is just one part. Low earnings, cash flow or credit ratings can no longer be blamed on "currency or interest or commodity or equity fluctuations" which could have been hedged as both current and potential future risks. Business risk exposure comes from international suppliers or customers or competitors, and thus RM decisions need to be "owned" by both financial and non-financial operating managers.

b.Risk management may be defined as: "The ability to identify, measure and assess limits to acceptable financial risk, which an organization may, at reasonable cost, defray or reduce, using available market instruments" as it involves such issues as: 1.How to add value to the business? How to optimize performance now and for the future? How to meet the needs of the stakeholders shareholders, staff, customers, suppliers, local government and the general public? 2.How to create and retain profitable customers? How to recognize the benefits, costs and penalties of change in anticipatory, reactive and crisis change situations.

c.Thus with the high volatility in currency, interest, commodity and equity markets (read the WSJ regularly) operating business managers need some basic understanding of financial RM and the relevant information appearing in the financial press.

96 3.2RISK MANAGEMENT (RM) STRATEGIES a.Four RM alternatives: 1.Non-involvement in RM on the theory that over long time periods, changes in the financial environment will average with no gain or loss (for the survivors?); this is supported by the view that forecasting financial transactions is highly inaccurate. 2.Create a "naturally hedging" business structure where active RM is not necessary e.g. currency cash flows and balanced are offset over the period and thus there is no FOREX risk. 3.Maintain a partially active RM program which a constant fixed percentage hedge is maintained to prevent total disaster. 4.Maintain a strategically active RM which modifies the hedge program based upon prevailing risk conditions.

b.Four steps in financial RM for interest rates, currency rates, commodities and equities, are: 1.Identify exposure risks. 2.Quantify exposure risks. 3.Establish RM strategies and policies. 4.Implement and monitor the RM programs regularly.

c.Four requirements for successful RM are: 1.Approval and support of the CEO and board. 2.Acceptance of the RM concept by all operating managers to ensure valid forecasts of risk exposure. 3.Relationships with financial institutions and Euromarkets. 4.Recognition of the impact of RM on financial reporting, earnings, cash flow and credit rating.

97 3.3WHEN TO HEDGE a.Need to define the amount of risk that shareholders and management are prepared to accept. b.The choice of RM strategy for managing risk may depend in large part on company's competitive position. A "lock-in every risk policy" not followed by competitors could be very expensive and result in a critical competitive disadvantage. c.For a UK based company, planning to purchase (in yn) from a Japanese supplier, there are four hedging approaches to currency risk: 1.Hedge when the order is being quoted for - a contingent risk 2.Hedge when the order is placed - appropriate where final selling prices cannot be changed; assumes that the supplier delivers on time. 3.Hedge when supplier invoices - appropriate if sales are based on a margin over suppliers' invoice prices; assumes competitors use a similar hedging strategy; otherwise might be a cost disadvantage during a period of rising yn. 4.Hedge for the entire budget period - needs an accurate forecast of purchases from Japanese suppliers to avoid excessive mis-matching between exposures and hedges. Requires a "View" of whether the yen was over- or under-valued; lock-in a high yen rate at budget time would be uneconomic if it weakens during the budget year. d.Leaving the contract unhedged - may in the long term produce about the same result as hedging; but it allows higher cash flow volatility and possible serious losses with rising yn rates. 3.4RM WITH OVER/UNDER HEDGING a.In large organizations, where managers often move periodically, their RM interests may not always coincide with those of the shareholders. b.With RM responsibility for three years, a strategy of leaving positions unhedged could produce a losses, which may affect the manager's performance appraisals adversely. Hence he may hedge excessively this is an example of "Agency cost". c.Shareholders may be unaware of this over-hedging strategy, and not be able to take this risk into account in valuing the company. d.Leaving risk exposure unhedged might be difficult for a manager to defend himself against a charge of "gambling". A "calculated" risk-cover could be obtained by using options to hedge a range of costs/prices. 3.5OVERALL a.When the CEO accepts the concept that low earnings, cash flow and credit ratings can no longer be blamed on "currency or interest or commodity

98 or equity fluctuations", then RM becomes a normal part of financial management in the company. b.Financial and non-financial operating managers must also "own" the concept, for RM decisions to be efficient and effective.

99 3.6LEARNING PATTERNS 1.FIRST very briefly ... SCAN the learning patterns which follow. 2.THEN ... study them carefully ... try very CREATIVELY to RELATE them to your own experience, problems and environment ... try to achieve a NEW PERCEPTION of strategic problems ... directly related to your own organizational unit ... 3.NOTE that the patterns have been specially designed to STIMULATE both conscious non-conscious learning ... can you make them work for you?

3.7INSTRUCTIONS (10 MINUTES) (a)Reassemble in SG (b)Study the lecture carefully and record key points in your notebook (c)Discuss outstanding questions (d)When the bell rings continue with the case study which follows.

100 ASSIGNMENT 4.0 CASE - B1 (60 MINUTES) 4.1INSTRUCTIONS (a)Reassemble in SG (b)Study the case and answer all the questions in your notebook and on the SG flipchart (30 minutes) (c)Then work in CSG as follows: A+D B+E C+F

with groups A, B, and C responsible for the CSG discussion (d)Reassemble in MG when the bell rings

101 EXHIBIT 1 B1 QUESTIONS ON THE CASE

1.Study the story of the case and identify the key points arising.

102 EXHIBIT 2 ***insert case

B1

103 ASSIGNMENT 6.0 - BILL BROWN (30 MINUTES) 6.1INSTRUCTIONS (a)Reassemble in SG (b)Study the case and individually answer all the questions (on the worksheet in the diary) (c)Compare your answers in SG (d)When the bell rings, stop for lunch! (e)After lunch, check with outstanding questions the correct solutions and discuss

104 EXHIBIT 1 BILL BROWN - QUESTIONS - MINICASES Bill Brown is a consultant in FOREX & RM, faced with the problems outlined in the six minicases which follow. For efficient and effective learning from each minicase: 1.Work individually to analyze the issues and record a decision in your note book. 2.Then discuss in SG and record your consensus on the flip chart (EI - emotional investment). 3. Then check with the answer which follows and give yourself a score out of 10. Record the total score out of 60, in the diary.

105 EXHIBIT 2 1.ANDRE COMPANY Company produces hospital equipment generally sold in UK. It buys half of the require input from Germany in DM. Most competitors in UK are firms with no international business. Question: a.How would Andre Company be affected by DM long term strengthening? b.What alternatives available? BILL BROWN

2.GENERAL MOTORS In a personal visit, the US President has persuaded the Japanese government to relax import controls. Question: Other things being equal, what effect on: a.US demand for Yen? b.Yen supply for sale? c.Equilibrium value of the Yen?

3.MIGUEL CORPN. Company is a US exporter to the UK which it invoices in pounds. It expects the pound to appreciate against the dollar. Question:Should Miguel hedge exports with a forward contract?

4.HOLLY CORPORATION CEO of Holly, wants to know how a company which hedged completely in the forward market based on its expected balance sheet as of the end of the period, still has a foreign exchange loss?

106 5.GILLIE COMPANY Gillie Company in USA, instructed its subsidiary in Devaluland to remit funds to the parent as soon as possible when a new devaluation was likely. This action was completed, and the parent was surprised to see that there was still a large foreign exchange loss on the funds, even though they were owned by the parent. a.How could this happen? b.Who should be held accountable? c.What options are open to reduce exposure in a devaluation-prone subsidiary? d.How might these options affect the business and the management incentives of the subsidiary? 6.XAVIER CORPORATION CEO wants to know: a.What are the different accounting alternatives for measuring FOREX exposure? b.Are they realistic? c.Would this hold for all corporations and countries? 7.FBI CORPN. The Board of Directors of a multi-national company asks the CEO to want to monitor the FOREX exposure positions of its international treasurer? a.What data would a CEO need to review the performance of the treasurer's activities? b.Do you believe the boards of most multinationals have such information? c.Do you believe they could interpret the information correctly if it were available? 8.REMM CORPN. Company has extensive international operations. Treasurer is considering hedging the net payable or receivables with some new currency options (straddle, strangle, butterfly, lookback, asian lookback, barrier or compounds) but CEO prefers forward contracts. Question: What are the disadvantages of options compared with forward contracts. 9.BERNARD COMPANY Company has negotiated a 90 day forward to purchase 200,000 UK pounds for payment to suppliers. The 90 day forward rate was $1.40/pound. On the settlement day of the forward contract the spot rate was $1.44/pound. Question:

107 a.What was opportunity cost of the hedging? b.Will it be reported in the financial statements?

108 EXHIBIT 4 BILL BROWN - ANSWERS 1.ANDRE COMPANY Company produces hospital equipment generally sold in UK. It buys half of the require input from Germany in DM. Most competitors in UK are firms with no international business. a.How would Andre Company be affected by DM long term strengthening? Whole range of currency exposures: transaction, translation, economic/strategic and contingency losses. Production costs will increase; profit margins will fall; competitive market advantage will be lost;

b.What alternatives available? Alternatives: seek alternative suppliers; hedge with forward or options to give time for strategic change.

2.GENERAL MOTORS In a personal visit, the US President has persuaded the Japanese government to relax import controls. Question: Other things being equal, what effect on: a.US demand for Yen - will decrease? b.Yen supply for sale - will increase

109 c.Equilibrium value of the Yen - will fall

3.MIGUEL CORPN. Company is a US exporter to the UK which it invoices in pounds. It expects the pound to appreciate against the dollar. Question: Should Miguel hedge exports with a forward contract? a.If the appreciation transactions. is short term hedge only for significant

b.If the appreciation is long term - hedge annually with forward contracts or options to make time for strategic adjustment.

110 4.HOLLY CORPORATION A completely hedged expected balance sheet as of the end of the period, can still have a potential foreign exchange loss due to: a.Inaccurate timing/amounts of cash forecasts of currency exposure. b.Delays in FOREX transactions. c.Changes in translation rates/ d.Costs of hedging.

5.GILLIE COMPANY Gillie Company in USA, instructed its subsidiary in Devaluland to remit funds to the parent as soon as possible when a new devaluation was likely. This action was completed, and the parent was surprised to see that there was still a large foreign exchange loss on the funds, even though they were owned by the parent. a.How could this happen? 1.Delay in FOREX transfers during currency movements. 2.Translation losses. 3.Failure to hedge. b.Who should be held accountable? 1.Subsidiary CEO for failure to organize RM. 2.Subsidiary treasurer for failing to hedge cash flows. c. What options are open to reduce exposure in a devaluation-prone subsidiary? 1.Natural hedging. Forward, futures, money market transactions. 2.Options with variations (strangle etc.) to limit the range of risk. d.How might options affect the business and the management incentives of the subsidiary? 1.Tendency to seek dollar cash flows and ignore local effects. 2.Local losses may reduce management bonus policies and motivation.

111 6.XAVIER CORPORATION a.What are the different accounting alternatives for measuring FOREX exposure? 1.Convert of assets and liabilities at different exchange rates - current or historical. 2.Take FOREX gains and losses to the income statement or to an equity reserve account. 3.Hedge for legal exposure or legal and and economic/strategic contingent exposure. b.Which is most realistic? 1.Convert all fully valued assets/liabilities at current rates. 2.Take all gains/losses into the income statement. 3.Hedge all exposure within specific RM policy guidelines. c.Would this hold for all corporations and countries? 1.No. There is a lot of accounting flexibility where holding company cash flows, earnings and credit rating may be materially affected. 2.Must encourage all operating managers to "own" the RM problem.

7.FBI CORPN The Board of Directors of a multi-national company asks the CEO to want to monitor the FOREX exposure positions of its international treasurer? a.Data needed: Weekly/monthly reporting of exposure levels Guideline compliance Opportunity profit/loss data Regular internal/external audit reports b.Availability: Yes, because of publicized fraud cases. c.Interpretation: With difficulty due to increasing FOREX complexity

112 8.REMM CORPN. What are the disadvantages of options compared with forward contracts. a.Exotic options may be too complex for the CEO to understand and support. b.Options may lead to significant losses for which Treasurer will be blamed. They may encourage him to speculate wildly to recover the losses (as in the allied Lyons case), endangering the company survival.

9.BERNARD COMPANY Company has negotiated a 90 day forward to purchase 200,000 UK pounds for payment to suppliers. The 90 day forward rate was $1.40/pound. On the settlement day of the forward contract the spot rate was $1.44/pound. a.What was opportunity cost of the hedging? Computed as: (1.44 - 1.40) X 200,000 = loss $8,000 b.Will it be reported in the financial statements. No, because the company met its target (lower) rate. Accountants do not record "what might have been" (opportunity cost).

113

UNIT IV - RM II

ASSIGNMENT 7.0 STUDY - ACTION (60 MINUTES) 7.1INSTRUCTIONS - INDIVIDUAL/SG WORK (a)Assemble in new SG (b)Read the lecture and discuss every issue in SG.

114 (c)Record the seven most significant issues on the flip chart provided. (d)Reassemble in MG when the bell rings

115 ASSIGNMENT 8.0 - LECTURE - RM II (60 Minutes) 8.1DIFFICULTIES WITH RM a. In 1996, there are basically four risks for which RM has been extensively applied: interest rates, foreign exchange, commodity prices and equity prices. b.Many difficult RM questions arise: 1.What strategy to deal with a strong home currency which seriously effects the company's export sales and earnings? 2.How can RM help to lower the company's cost of capital and make it better able to compete globally? 3.How to "position" the company for future changes in: fixed/floating debt, liquidity, maturity schedules? 4.How to take advantage of expected trends in interest rates? 5.How to deal with current accounting rules that restrict hedging to "booked exposure" and thereby deter RM of the real major economic, strategic and contingent exposures? 6.How to maintain sales margins when the dollar (or functional currency) weakens? 8.2RM ACCOUNTING PROBLEMS a.Accounting rules tend to restrict RM to legal or "booked" exposure. The actual economic exposure of the firm may be very different from the accounting exposure, depending on whether the present value of the future cash flow is increased or decreased as a result of currency movements. b.In accounting exposure, accounts are "translated" into financial statements at current rates or a wide variety of historic and other rates, which may materially affect the earnings and credit rating of a company. c.Alternative accounting translation methods for using current rates, include; 1.Current/non-current method - only current assets less current ]inabilities. 2.Monetary/nonmonetary method - only current assets except inventory less current and long-tenn liabilities. 3.Net financial asset method - only current assets less current and long-term ]

116 inabilities. with many variations as to how other assets and liabilities may be translated for annual financial statements.

117 d.In USA under FAS 52, all assets and liabilities are translated at current rates and exchange gains and losses are direct charges to the income statement (with exceptions). In other places, a variety of rates may be used; gains and losses may be charged to the income statement; or they may be charged to a vague "equity type" reserve account. e.Thus trying to measure effective RM, by the reported FOREX and other hedging gains and losses, requires very careful analysis because there is great scope for "creative accounting". 8.3CURRENT APPLICATION OF RM a.Many large companies use RM to convert fixed to floating debt in "interest rate swaps" and to do extensive FOREX hedging. b.Many resource companies ignore RM in favor of "natural hedging" (balancing exposure flows), with mixed results. c.With global competition and high volatility of interest, currency and equity markets, RM is a growth area for opportunities to protect the key financial risks of assets/liabilities, cash flow. earnings and credit rating. RM is now probably essential for the SURVIVAL of the of EVERY company. e.However, the key to efficient and effective RM is not the increasing complexity of hedging instruments and computations, but rather the increasing cooperation between financial and non-financial operating managers throughout the company. f.In 1996 RM is now a "normal" part of financial management. 8.4OVERALL a.In 1996 with global competition and high volatility of interest, currency and equity markets, RM is essential for the survival of every major company. b.The key to efficient and effective RM is not increasing complexity in making computations, but increasing cooperation between financial and nonfinancial operating managers throughout the company.

118 8.5LEARNING PATTERNS 1.FIRST ... scan ... 2.THEN ... study ... 3.Can you make them work for you?

8.6INSTRUCTIONS (10 MINUTES) (a)Reassemble in SG (b)Study the lecture carefully and record key points in your notebook (c)Discuss outstanding questions (d)When the bell rings, carry on with the case study which follows

119 ASSIGNMENT 9.0 CASE - B2 (75 MINUTES) 9.1INSTRUCTIONS (a)Reassemble in SG (b)Study the case carefully and answer all the questions in your notebook and on the SG flipchart (45 minutes) (c)Work in CSG as follows: A + E, B + F, C + D with groups D, E, F responsible for the CSG. D, E, F represent the Allcomm A, B, C represent the CG (d)Reassemble in MG when the bell rings

120 EXHIBIT 1

B2 QUESTIONS ON THE CASE 1.

121 EXHIBIT 2 B2

122 11.0 - QUIZ (45 MINUTES) 11.1INSTRUCTIONS (a)Reassemble in SG (b)Do the quiz of 70 questions on the answer sheet in the diary (c)Check your answer with the organizer and resolve outstanding questions (d)Complete the first feedback form in the course diary and give it to the organizer. (e)Reassemble in MG when the bell rings

123 12.0 ASSIGNMENT - SUMMARY LECTURE FOR PART II (30 MINUTES) 12.1OBJECTIVES The specific learning objectives are to: a.Recognize and use FOREX and RM language and concepts b.Analyze FOREX operational and strategic issues. c.Relate RM concepts to current and future business opportunities. d.Develop confidence in participating in RM management decision-making. e.Motivate further study in the future 12.2RISK MANAGEMENT (RM) CHALLENGES a.In 1996 every large business is exposed to "international risk" from suppliers, customers or competitors, and needs RM. b.Risk management (RM) tools are now available to "hedge" changes in foreign exchange rates, interest rates, commodity prices and equity valuations. Thus current and future risks of lower earnings, cash flow and credit ratings can no longer be blamed on "the market"; they can be "hedged" (insured against loss). c.For efficient and effective RM, both financial and all non-financial operating managers need to "own the risks" be involved in RM decision-making. 12.3SPECIFIC FOREX ISSUES a.FOREX is a key part of RM. Even with EMU (European Monetary Union) in 1997 (or 2097!), there will still be FOREX risk between Dollars, Yen, Euros etc. b.The current trend of "out-sourcing" of materials and services internationally, creates FOREX risk. when buying or selling foreign currencies or when competitors are doing so. c.The key FOREX issues facing industry, commerce, exporters, importers, and others active in international trade are: 1.Identifying the source of the risk.

124 2.Analyzing the risk. 3.Selecting and appropriate FOREX strategy. 4.Managing the strategy. d.There is a need to assess the nature, size and "time horizon" of significant FOREX risks which may be: transaction risks, translation risk, economic risk or strategic risk or contingent risk. 12.4FOREX TERMINOLOGY a.The financial press publishes complex FOREX reports daily, using a special terminology (read WSJ daily). b.Basic FOREX terms are: spot transaction, cross rate, hedging, forward contract, future, option, swap etc. See glossary for more detail.

125 12.5HEDGING a.Hedging is the technique for reducing the risk of FOREX losses with four basic hedging alternatives: 1.Natural hedging 2.Lock-in the future exchange rate with: a forward, money market deal or future 3.Leave the position open 4.Hedge with a series of options/swaps. 12.6HEDGING WITH FORWARD CONTRACTS a.The forward contract is by far, the most commonly used currency hedge. b.The contract may be to buy (call) or to sell (put) a fixed amount of foreign currency at a fixed price and a fixed future delivery date. No effect on cash until maturity. 12.7HEDGING WITH THE MONEY MARKET a.The money market hedge, buys foreign currency with dollars on the spot market on July 8, invests the currency until the payable is due on October 8. The currency investment must financed. c.The money market hedge may be sometimes be cheaper than a forward contract when better differential interest rates are available. 12.8HEDGING WITH FUTURES a.Buy foreign currency "Futures" to lock-in the effective foreign exchange rate on the payable. b.Similar to a forward contract, but provided only in standard high amounts for standard fixed time periods, by a "Futures Exchange", not a bank. 12.9HEDGING WITH OPTIONS/SWAPS a.An option may be used as a single hedge or in a series to limit the range of risk. Buyer must pay a premium to the writer (seller) of the option, for the "right" but not the "obligation" to buy (call - "long") or sell (put "short") the foreign currency. b. The option hedge fixes the worst possible outcome, when exercised ("in the money"). c.Many synthetic instruments (combinations of calls and puts and forwards) available including: average, asian, barrier, box, butterfly, compound,

126 conversion, lookback, spread, straddle, strangle, strap. strip etc. d.A "swap" transactions is a contract between two parties to exchange specified cash flows for some specified future period. Similar to multiple forward contracts.

127 12.10PRICING OF HEDGES a.Forward rates are a mathematical function of spot exchange rates and the differential interest rates for the two currencies for the time horizons 30, 60, 90, 180 days. Prices do not depend on supply and demand. b.Futures prices are determined by models of as a function of supply and demand in the futures market, and related by arbitrage to forward rates. h.Option/swap prices are based upon models as a function of the: relative interest rates, forward exchange rate, time to maturity, and volatility of future spot rates. 12.11WHEN TO HEDGE a.The choice depends on the company's competitive position. c.Four approaches to hedging currency risk on a new supplier contract: 1.When 2.When 2.When 3.When order is being planned order is placed order invoiced setting the budget for the year.

12.12PROFIT FROM FOREX TRADING a.Some multi-national companies set up a "Group FOREX Finance Unit" or company, as a profit center with very careful monitoring of the key problems: 1.How 2.How 3.How 4.How to define an adequate level of performance. much profit for how much risk? to measure accounting profit/loss in relation to "opportunity cost" and risk? is risk affected by poor judgment and possible fraud?

12.13CONTINUING FOREX ISSUES a.Careful analysis of current and critical future risks, is critical to the hedging decision. b.Complex hedge instruments and computations are no substitute for good business judgment, reliable forecasts of cash flows and risks. c.Critical FOREX questions are: 1.What is the "functional currency" to be protected? 2.What time horizon? 3.Should we hedge commitments before legal obligations?

128 4.Should hedging make a profit? 5.How to control FOREX gambling?

129 12.14GENERAL RISK MANAGEMENT (RM) CHALLENGES a.RM is the ability to: "Identify, measure and assess limits to acceptable financial risk, which an organization may, at reasonable cost, defray or reduce, using available market instruments" b.RM involves such issues as: 1.How to add value to the business to meet the needs of all stakeholders. 2.How to create and retain profitable customers and recognize the benefits of anticipating change situations. 12.15RISK MANAGEMENT (RM) STRATEGIES a.Four RM alternatives vary from: "complete non-involvement", to "natural hedging" and more sophisticated RM. b.Four steps in financial RM are: 1.Identify exposure risks. 2.Quantify exposure risks. 3.Establish RM strategies and policies. 4.Implement and monitor the RM programs regularly. c.Four requirements for successful RM are: 1.Approval and support of the CEO and board. 2.Acceptance by operating managers to ensure valid forecasts of risk exposure. 3.Relationships with financial institutions. 4.Recognition of the impact of RM on financial reporting, earnings, cash flow and credit rating. 12.16RM WITH OVER/UNDER HEDGING a.In large organizations, where managers move periodically, their RM interests may not always coincide with those of the shareholders. b.With RM responsibility for three years, a strategy of leaving positions unhedged could produce a losses, which may affect the manager's performance appraisals adversely. Hence he may hedge excessively, causing high "Agency cost".

130 12.17DIFFICULTIES WITH RM a. In 1996, there are basically four risks for which RM has been extensively applied: interest rates, foreign exchange, commodity prices and equity prices. b.Many difficult RM questions arise: 1.What strategy to deal with a strong home currency which seriously effects the company's export sales and earnings? 2.How can RM help to lower the company's cost of capital and make it better able to compete globally? 3.How to "position" the company for future changes in: fixed/floating debt, liquidity, maturity schedules? 4.How to take advantage of expected trends in interest rates? 5.How to deal with current accounting rules that restrict hedging to "booked exposure" and thereby deter RM of the real major economic, strategic and contingent exposures? 6.How to maintain sales margins when the dollar (or functional currency) weakens?

12.18RM ACCOUNTING PROBLEMS a.Accounting rules tend to restrict RM to legal or "booked" exposure The actual economic exposure of the firm may be very different. b.In accounting exposure, accounts are "translated" into financial statements at current rates or a wide variety of other rates, which may materially affect the earnings and credit rating of the company. c.Many alternatives available. Trying to measure effective RM, from the reported FOREX gains and losses, requires very careful analysis, because it ignores "opportunity cost" and there is great scope for "creative accounting".

131 12.19CURRENT APPLICATION OF RM a.Many large companies use RM to convert fixed to floating debt in "interest rate swaps" and to do extensive FOREX hedging. b.Many resource companies ignore RM in favor of "natural hedging" (balancing exposure flows), with mixed results. c.With global competition and high volatility of interest, currency and equity markets, RM is a growth area for opportunities to protect the key financial risks of assets/liabilities, cash flow. earnings and credit rating. RM is now probably essential for the SURVIVAL of the of EVERY company.

132 12.20LEARNING PATTERNS 1.FIRST ... . 2.THEN ... study .. CREATIVELY ... 3.Could you make them work for you?

133 12.22CONCLUSIONS aThe key to efficient and effective RM is not the increasing complexity of hedging instruments and computations. b.It is the increasing cooperation between financial and non-financial operating managers throughout the company. c.In 1996 RM is now a "normal" part of financial management.

134 FINAL NOTE This ends our AGL program. We hope it has inspired you to develop your skills by practical application. Thank you for your interest and hard work. Keep the workpack and glossary handy as a daily reference. We hope that you have much enjoyed the AGL experience and that it motivates you to read widely in strategy and to continue your studies in the future. Now reinforce your learning from the program by following the LRT (Learning Recall Tape) routine, as explained by the organizer, for about one hour each day, on days 6, 12, and 24 following completion of the AGL program. Then please send us the Final Feedback Summary on day 28. We trust that you have found AGL to be both "efficient" (doing things right) and "effective" (doing the right things). Thank you for being a member of the program. RGAB/LR Geneva

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