CIFFA: Managing FX Risks MAY 2016

Transcription

1 CIFFA: Managing FX Risks MAY 2016

2 Today s Objectives 2 Discuss the recent volatility of currency, and what makes the future value of currency so difficult to predict Assess FX risk to freight forwarders Share some ideas on how freight forwarders can protect from risk while gaining upside

3 Global Currency Markets 3 Global Currency Markets $4+ trillion average daily turnover (BIS Apr 2010) Market open - 24/6 Cross border trade and financial and direct investment flows underlie Speculative/investment flows amplify commercial flows US dollar is the base currency

4 Global Currency Markets 4 Valuing a currency pair USD/CAD Relative interest rate GDP growth Capital trade flows Commodity prices Perceived safety

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11 Forecasts How Helpful? FX POLL JAN

12 Forecasts How Helpful? FX POLL APRIL

13 So what can I do? 13

14 Defining Risk 14 What is risk? How would you define risk?

15 Defining Risk 15 At its most basic level, risk is exposure to change Risk therefore has both positive and negative connotations What level of risk is appropriate for your business?

16 Why Hedge? 16 Hedging gives you back two things: Time: less spent watching markets and trying to predict the best time to exchange AND Certainty: a rate you can budget with and rely on

17 The Risk Management Process 17

18 Building an FX Strategy 18 Things to consider: Timing When are you exposed? When should you hedge? How often should you hedge? Goals Increased profits? Taking advantage of opportunity? Budgeting certainty? Cash flow How important is liquidity for your business? Can you sit on cash and wait?

19 Choose Your Weapon 19 Three Basic Actions: Spot Market Take no action Forward Hedge Lock-in a rate Option Hedge Insurance

20 Spot: Take no Action 20 Spot: taking no action leaves a company s cash flows 100% exposed to market fluctuations

21 Forward Hedge: Lock-In 21 Forward Hedge: locking in a guaranteed rate takes out the impact of currency fluctuations on specific cash flow

22 Option Hedge: Insurance 22 Option Hedge: provides both downside protection and upside participation

23 To Hedge Or Not To Hedge? 23 The benefits of hedging your FX exposures with Options 1) Maintain downside protection 2) Ensure the value of revenues and margins 3) Allow for upside participation

24 Case Study 24 The Situation The FX Challenge Goals Canadian Freight Forwarder Terms agreed May 2 nd Protect against currency Agrees to a project with a US USDCAD is at swings provide firm quotes client in California multiple loads to Canada Paid upon completion in US dollars Payment expected July 30 th Need to guarantee that payment is worth at least USDCAD Budget for a worst case scenario Participate in favourable market moves

25 Spot % Exposed No certainty Very risky situation You have assumed all the risk your customer has a set rate.

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27 Forward % Certainty BUT No flexibility should rates move in your favour

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29 Option 29 Protection and Participation You have reduced exposure to negative risk while maintaining exposure to positive risk

30 Hedging Product: Collar 30 Product Collar Protection Rate Participation Rate Amount 1,000,000 Expiry 3 months

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32 Hedging Product: Participating Forward 32 Product Participating Forward Protection Rate Participation Rate UNLIMITED Amount 1,000,000 Expiry 3 months

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34 Hedging Product: Knock-Out Convertible 34 Product Knock-Out Convertible Protection Rate Conversion Rate Participation Rate* UNLIMITED* Amount 1,000,000 Expiry 3 months

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36 The Hedging Goal 36 By using options to hedge your FX risk, you: Protect your bottom line Create opportunities to improve profit margins Increase certainty and save time

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38 Questions 38 J.P. Doré SVP Sales Direct:

39 39 The information contained in this document has been prepared by EncoreFX Inc. (EncoreFX) as general comments on matters of interest only, and does not constitute professional advice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable however no representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained herein. You should not act upon the information contained in this document without obtaining specific professional advice. EncoreFX and its employees do not accept any liability whatsoever and disclaim all responsibility for any loss arising from any use of this information.