T H E F X C O N U N D R U M : Y O U R C U R R E N C Y, O R M I N E?

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1 You may be paying a premium and creating reconciliation headaches by paying or buying international vendors in US dollars. May 2017

2 The Currency Conundrum Overseas suppliers may react to a weakening dollar against their currency by raising their dollar price 1. You can avoid the likelihood of such repricing by paying in the supplier s currency. Don t let currency movements dictate the price of your purchase. Example: Paying a Mexican supplier 100,000 US dollars today could cost almost $7,400 more when paid 60 days later. Proactively managing your payments puts you in the driver s seat. Currency 11/1/ /31/2016 Value of the currency against the dollar EUR % GBP % MXN % This information contained in this slide is for historical reference only and is not intended to predict future currency movements

3 The Payments Process Flow USD Payment Your account Your bank Vendor s Bank 2 Vendor s account Vendor s Account

4 The Payments Process Flow USD Payment VENDOR S BANK DOES THE CONVERSION Your account Your bank Vendor s Bank 3 Vendor s account Vendor s Account

5 The Payments Process Flow USD Payment YOUR BANK DOES THE CONVERSION Your account Your bank Vendor s Bank 4 Vendor s account Vendor s Account

6 Business Benefits When does your bank withdraw funds from your account? Paying in local currency can improve cash flow. Two days of funds availability can be meaningful in terms of earnings credit and cash flow availability. Typical Value Currency Date AUD T + 1 BRL T + 2 CHF T + 1 EUR T 8:30ET GBP T 11:20ET HKD T + 1 INR T + 1 JPY T + 1 KRW T + 2 MXN T 13:30ET NZD T + 1 RMB/CNY T + 1 RUB T + 2 SGD T + 1 ZAR T + 1 5

7 Business Benefits YOUR BANK DOES THE CONVERSION T+2? Your account Cash flow benefit to you Your bank Vendor s Bank Vendor s account Invoice issued for 10,000 Funds received: 10,000 Vendor s A/R Ledger

8 Vendor Benefits Your vendor could expect prompter payments and an easier account reconciliation process if you choose to pay in its local currency. When you make a foreign payment in US dollars, the vendor s bank automatically converts it to the currency of the receiving account, often without contacting the recipient. This creates two likely challenges for your vendor s accounts receivable (A/R) team: Delays in receipt of funds: Many banks take two business days to post cross-currency payments to accounts, even for currencies that allow delivery on the same or next day after receipt. You may be able to deliver funds more quickly with no disadvantage to you if you pay in the vendor s currency. Difficulty matching credits to invoices: If your vendor s A/R ledger is in euros, for instance, its reconciliation team may struggle to match your payment credit because the converted euro amount won t match the amount on the invoice. They can only hope the invoice reference details you provide in the wire transfer appear on the account statement. 7

9 Vendor Benefits T+2? Your account Your bank Vendor s Bank Vendor s account Invoice issued for 10,000 Funds received: 10,000 Vendor s A/R Ledger Reconciliation benefit to your vendor

10 Additional Considerations Vendor risk: You're likely already paying a risk premium when transacting in dollars because your vendor will account for possible currency fluctuations when quoting you a price in dollars. You can take control of pricing by asking vendors to generate invoices that show prices in both US dollars and the local currency. Then consult with your bank to determine which currency option is better. Changes to accounts payable processing flow: Most banks include the option for foreign currency payments in the same web screen as dollar payments, so the user experience likely won't change. The wire instructions will change only slightly and can be provided by your vendors to ensure accuracy. If needed, you can work with your bank to streamline payment processing. 9

11 Solutions for Paying in Foreign Currency Negotiate prices with sellers. If you're beholden to a specific currency when paying your suppliers (in USD or otherwise), consider negotiating around the foreign currency element and devising a supply chain policy to guide these decisions. Convert USD to local currency when making any purchases. You can pay your suppliers in their local currencies by sending foreign currency wires from a US account directly via an online banking system. While there s a cost to the foreign currency conversion, there's not an additional account needed for foreign payments. Change your purchasing currency, and open an account in that currency. You may also consider setting up a nonresident or resident offshore bank account for foreign currency disbursements. If you begin to hold foreign currency, consider whether you have expenses in that currency that you can match. Talk to your accounting firm about the cost of sending dividends, paying interest or other tax implications that may result. 10

12 Case Study: Paying in Foreign Currency - China A wholesale distributor based in the southeastern US imported machine tools from China for more than 80 years and always paid in US dollars. Beginning in 2010, the liberalization of the Chinese currency allowed for the distributor to make payments in CNH, the Chinese currency traded outside of mainland China. By agreeing to pay in CNH, the wholesale distributor was able to negotiate more favorable pricing from their vendor. 11

13 Case Study: Paying in Foreign Currency - Europe Pie Co. has large grocery chain customers in Europe. The chains pay Pie Co. in USD and sell the pies in their stores priced in euros. There is foreign currency risk baked into this transaction, as well. The grocery chains will recognize the added cost of paying in USD as higher input costs. In order to maintain profit margins, the grocery chain may need to increase the retail price of its pies. Upward price adjustments can affect demand for the goods and ultimately Pie Co. s sales. 12

14 Buying in Foreign Currency Case Study - Mexico A US company, Pie Co., imports fruit from Mexico. Historically, Pie Co. has always paid its Mexican supplier in USD. But by doing so, Pie Co. is passing the buck, both literally and figuratively. When the USD strengthens against the Mexican peso, the supplier will benefit; as its production costs are denominated in the weaker peso, it widens the profit margin. On the other hand, Pie. Co. would be overpaying in peso terms. The benefit and loss from a strong currency can go both ways, and both parties should recognize the currency impact and adjust prices. 13

15 Solutions for Selling in Foreign Currency Offer invoicing in foreign currency Even as a US company, you can invoice and receive payment in foreign currency. The payments can be received in several ways. Funds can come into an existing account in the US and be immediately converted to USD through a foreign exchange spot transaction. Funds can be collected in a foreign currency account offshore and held in local currency. A company can also receive payments via credit card from foreign customers and have those payments converted by a credit card processor. 14

16 Solutions for Selling in Foreign Currency Negotiate prices with buyers Once currency is considered a factor in your value chain, plan for fluctuations, and devise a policy for pricing that includes foreign currency risk. Your company should consider the currency factors that drive your margin up and down and discern its true exposure. For example, if Pie Co. were to discount sales to account for a strong USD, would it see any offsetting benefit elsewhere in the supply chain? Your finance department should participate in pricing discussions and devise a plan that allows you to be nimble when currencies move. You can talk to your bank s FX risk management resource for market information on foreign currencies, which should help you be more aware of the offsets within your value chain. 15

17 More to think about Simple payments in a foreign currency shouldn't be confused with foreign exchange trading and hedging. More experienced treasury practitioners will employ FX risk management instruments such as forwards, swaps and options to support cross-currency payments. Collaborate with specialists on your bank s FX desk to tailor appropriate solutions for your business. U N T I T L E D S E C T I O N 16

18 What to do Negotiate prices with buyers / suppliers. Employ dual currency invoicing. Fund cross-currency payments on the currency value date, as opposed to the transaction date. Engage your Treasury Services banking professional to learn how to make simple cross-currency payments using their Web portal. Discuss currency risk management approaches with an FX Advisor. U N T I T L E D S E C T I O N 17

19 Chase, J.P. Morgan and JPMorgan Chase are marketing names for certain businesses of JPMorgan Chase & Co. and its subsidiaries worldwide (collectively, JPMC ) and if and as used herein may include as applicable employees or officers of any or all of such entities irrespective of the marketing name used. This presentation was prepared exclusively for the benefit and internal use of the JPMC customer or potential customer to whom it is directly delivered and/or addressed (the Company ) and does not carry any right of publication or disclosure, in whole or in part, to any other party. This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, any oral briefing provided by or other discussions with JPMC. Neither this presentation nor any of its contents may be duplicated, published or disclosed (in whole or in part) or used for any other purpose without the prior written consent of a JPMC entity. This presentation is providing only general information regarding certain of JPMC s products or services as described herein, is for general illustrative purposes only and is not intended as nor shall it be deemed to constitute advice or a recommendation regarding the issuance of municipal securities or the use of any municipal financial products. JPMC is not providing any such advice or acting as the Company s advisor, including, without limitation, as a Municipal Advisor under Section 15B of the Securities and Exchange Act of 1934, as amended. The Company should consult with its own financial and other advisors to the extent it deems appropriate. Products and services may be provided by commercial bank affiliates, securities affiliates or other JPMC affiliates or entities. In particular, securities brokerage services other than those which can be provided by commercial bank affiliates under applicable law will be provided by registered broker/dealer affiliates such as J.P. Morgan Securities LLC, J.P. Morgan Institutional Investments Inc. or by such other affiliates as may be appropriate to provide such services under applicable law. Such securities are not deposits or other obligations of any such commercial bank, are not guaranteed by any such commercial bank and are not insured by the Federal Deposit Insurance Corporation. Not all products and services are available in all geographic areas. Eligibility for particular products and services is subject to final determination by JPMC and or its affiliates/subsidiaries. This presentation does not constitute a commitment by any JPMC entity to extend or arrange credit or to provide any other products or services. U N T I T L E D S E C T I O N