What is FX Risk? Measuring FX Risk What Hedgers Want What Hedgers Do Hedging Challenges How to Hedge Q&A

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2 AGENDA What is FX Risk? Measuring FX Risk What Hedgers Want What Hedgers Do Hedging Challenges How to Hedge Q&A This presentation is provided for informational purposes only and does not provide any financial, legal, accounting or tax advice.

3 WHAT IS FX RISK? In the financial world, risk management is the process of identification, analysis and acceptance or mitigation of uncertainty in investment decisions. Essentially, risk management occurs any time there is Are you analyzes and attempts to quantify potential for ready When things don t go as planned? losses. Then taking the appropriate action (or inaction) given objectives and risk tolerance.

4 UNPREDICTA BLE EVENTS

5 MEASURING FX RISK

6 How would a negative 10% FX move impact my *according to Well Fargo 2016 Risk Management Practices Survey profits? MEASURING FX RISK Understanding FX impact is the first step in proper management < 1/5 th of companies properly measure FX risk* 26% of public companies 10% of private Simple understanding of profits at risk helps shape hedging decisions

7 MEASURING FX RISK - METHODS Value at Risk (VaR) Sensitivity analysis Scenario analysis

8 AN INTRODUCTION TO VALUE AT RISK (VA R) What is my worst case scenario? Time period, confidence level and $ loss Take the worst 5 or 10% unfavourable changes over a time period Value at risk is one approach to try and predict future moves based on historical volatility in the currency pair Assuming USD 12m transacted evenly throughout the year Analysis carried out w ith annual returns over 30 years

9 ANNUAL RETURNS OVER 30 YEARS VAR analysis 95% confidence the market w ill not move > % 99% confidence the market w ill not move > % Cashflow analysis USD 12m per year 1.30 = CAD 15.6m 95% of the years negative impact to earnings w ill not be greater than CAD 2,362,524 99% of the years negative impact to earnings w ill not be greater than CAD 2,841,054

10 SENSITIVITY ANALYSIS Spot Rate Profit/Loss* 1.40 $1,200, $600, Budget rate $(600,000) 1.20 $(1,200,000) * Based on 12M USD FX exposure (USDCAD Seller)

11 SCENARIO ANALYSIS Helps to determine the impact on a currency or asset based on an event. Candidate Probability Expected Return Trump 20% -10% Clinton 80% 2% Probability Weighted Return -0.40%

12 WHAT HEDGERS WANT

13 TOP HEDGING OBJECTIVES

14 OBJECTIVE 1: SMOOTHING RESULTS 2/3rds manage risk systematically 40% hedge max 12 months, 42% hedge longer 55% use layered hedging strategy *according to Well Fargo 2016 Risk Management Practices Survey

15 OBJECTIVE 2 : PROTECTING BUDGETED RATES Used extensively by public and private co s Even if you don t set a budget rate, one is implied based on your forecasts Benchmark is important *according to Well Fargo 2016 Risk Management Practices Survey

16 BUDGET RATES HOW THEY RE SET 42% use FX forecasts* 27% use spot rates* 9% use forward rates* 13% blend current hedge rates* *according to Well Fargo 2016 Risk Management Practices Survey

17 SHORTCOMINGS OF BUDGET RATE METHODS FX forecasts very little predictive pow er Using the prevailing spot rate moving target, potentially anomalous Using prevailing forward rates better, but still cumbersome Using a blend of current hedge rates lowest variation in forecast to actual *according to Well Fargo 2016 Risk Management Practices Survey

18 FORECAST (IN)ACCURACY Median: % drop GBPUSD Actual Outcome: /1/ /1/ /1/ /1/2015 1/1/2016 2/1/2016 3/1/2016 4/1/2016 5/1/2016 6/1/2016 7/1/2016 8/1/2016 9/1/2016

19 FORECAST (IN)ACCURACY GBPUSD Thomson Reuters Oct 2016

20 FINDING THE RIGHT BALANCE Buffer zone Realistic, achievable and competitive Don t measure results vs the spot market

21 OBJECTIVE 3: IMPROVING FORECASTS 68% hedge forecasted transactions 92% use forwards, 39% use option Hedging know n and forecasted transactions brings stability to forecasts *According to Well Fargo 2016 Risk Management Practices Survey

22 WHAT HEDGERS DO

23 HEDGING STRATEGIES

24 WHAT DO THEY HEDGE?

25 HEDGING CHALLENGES

26 RISK M A NAGEM ENT CHALLENGES Absence of formal hedging policy Lack of risk quantification When to hedge? Clear lack of planning, oversight and control. *according to Well Fargo 2016 Risk Management Practices Survey

27 HEDGING POLICIES Your best risk management tool Outlines your hedging strategy and processes in w riting Guides decision making no more guessing Sets risk limits, thresholds and responsibilities Encourages discipline Gives board level visibility

28 RISK QUANTIFICATION Most companies don t quantify their FX risk in any meaningful way A relatively simple calculation can give you a high level understanding of your risk, helping you to better manage it Quantitative and statistical methods like Value at Risk (VaR), sensitivity analysis and scenario analysis are common

29 WHEN TO HEDGE? Have a plan Set rules Be consistent Don t guess

30 HOW TO HEDGE

31 LAYERED HEDGING STRATEGIES Hedges in various amounts and time periods diminishing profile Hedges built up over time Decisions based on rules and time constraints Consistent approach smooths future cash flow s

32 LAYERED HEDGING STRATEGIES Floating (SPOT) Min Hedge 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month mos. 80% min 4 6 mos. 60% min mos. 20% min 7 9 mos. 40% min

33 LAYERED HEDGING STRATEGIES Floating (SPOT) Top Up Hedge Min Hedge 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Month 13 As the month rolls off, you top up the protection in line with the min (or Max)%

34 LAYERED HEDGING STRATEGIES USDCAD SPOT SPOT Blended *Simulated outcomes

35 RISK MANAGEMENT PROCESS STEP 1: Review Performance and Quantify Risk STEP 4: Execute Plan STEP 2: Set Goals STEP 3: Develop Strategy

36 WHAT A RE THE RESULTS? Reduces earnings volatility and protects cash flows over time Helps forecasting Guides decision making Significantly reduces risk Adding structured products into the hedging mix w ill also help companies protect their dow nside risk w hile still giving the opportunity for upside participation

37 CONCLUSION Volatility is the new normal in financial markets. FX risk still a blind spot It all starts w ith a plan Understand your risk, measure it and build your strategy Execute w ith discipline market psychology is powerful Use a policy Review and adjust your strategy regularly

38 Q & A

39 THANK YOU Eddie Cortez Mobile:

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