Treasury Management Essentials Sponsored by: Copyright 2012 Wintrust Financial Corporation. All Rights Reserved. FOREIGN EXCHANGE STRATEGIES TO HELP YOUR

Treasury Management EssentialsSponsored by:

Copyright 2012 Wintrust Financial Corporation. All Rights Reserved.

FOREIGN EXCHANGE STRATEGIES TO HELP YOUR BUSINESS – ARE YOU READY TO GO GLOBAL?

Tom BeubeVice PresidentInternational ServicesWintrust Commercial [email protected]

Sarah E. Grooms, CTPVice PresidentTreasury ManagementTown Bank/[email protected]

mailto:[email protected]


2Treasury Management Essentials sponsored by Wintrust Commercial Banking


Who in the room has thought or said the following:

“I don’t have foreign currency exposure – we price everything in U.S. dollars.”

F IRST TH INGS F IRST… A QU IZ :



What we’ll cover today:

• Pro’s and Con’s of Hedging• Market Liquidity

• Why USD Is Not Always Best

• Reasons people do or do not hedge

• Foreign Exchange/Currency Hedging Tools

• Cross-Border Trade Tools

• Questions

AGENDA



• Quiz answer: False!• But many believe it to be true

• More and more companies going global regardless of sales size

• Average daily turnover of global FX spot transactions reached $1.5 trillion in 2010

• Pricing in dollars does not mean there is no currency risk

• Collection and Payment Exposure

WHY U .S . DOLL AR IS NOT ALWAYS BEST



MARKET VOL AT IL ITY



MARKET VOL AT IL ITY



• Currency markets are extremely liquid and transparent

• London and New York are most prominent centers of activity

• U.S. Dollar is the most liquid, followed by the Euro

• Most currencies trade with a standard two day settlement

• Majority of countries have floating exchange rates

MARKET L IQU ID ITY



WHY DON’T YOU WANT TO HEDGE?

We don't do enough foreign business

Perceived hassle outweighs benefits

Have not ever considered it

Have considered; don't know benefits

Aware of benefits; don't know how to

manage risks

I thought this was just for really huge

companies

0%

5%

10%

15%

20%

25%

30%

35%

40%

36%

30%

26%

15%14%

4%

Dec 2010 AMEX FX International Payments Trade Tracker Survey



Potential Benefits

• Cash Flow Predictability

• Budgeted Forecast

• Satisfies Risk Aversion

• Concentrated Risk(s)

• Margin Preservation

Potential Detractors

• Procrastination Hurts

• Accounting Concerns

• Long Run “Immateriality”

• Too Confusing

• Lack of Hedging Framework

PROS VS . CONS OF TRANS ACT IONAL HEDGING

Dec 2010 AMEX FX International Payments Trade Tracker Survey



• Known amount being received by the beneficiary bank

• Beneficiary usually receives funds more quickly

• What this means for you: Better Pricing Terms!

WHY YOUR FORE IGN CUSTOMERS M IGHT LOVE IT

Treasury Management Essentials sponsored by Wintrust Commercial Banking

Spot vs. forward currency hedging

SPOT VS . FORWARD CURRENCY HEDGING



• Typical FX Transactions • Sending payments to a supplier

• Receiving payments from buyers

• Managing currency risk

• FX Products of Choice • Spot Transaction

• Fixed Date Forward

• Window Forward

TYP ICAL FX TRANS ACT IONS & PRODUCTS OF CHOICE



• Spot transaction: • Foreign currency trade for 1– 2 day settlement

• Fixed date forward: • Foreign currency trade, locking in a specific conversion rate for

settlement in the future • Maturities up to one year

• Notional amounts can be specified

• Window forward: • Foreign currency trade, locking in a specific conversion rate for

settlement to occur over a “period of time” in the future.

FX PRODUCT TOOLK IT



• Contract of buying or selling the currency for settlement (payment and delivery) on the spot date (normally two business days after the trade date)

• Funds are typically wired out same-day for settlement within two business days (time zones, etc. – exception: USD/CAD)

W H AT I S A S P O T T RA N S A C T I O N ?( A L S O C A L L E D S P O T C O N T RA C T , S P O T T RA N S A C T I O N , F X S P O T )



Great For:

• One-time transaction

• Wildly varying amounts going to same vendor

• What if I have a long-term, multiple-shipment contract to hedge?

WHEN WOULD I USE A SPOT?



• Priced at a premium or discount off the current spot rate to account for interest rate differentials in the home countries of the currency pair

• Eliminates currency risk

• Customized to the needs of the individual client

WHAT IS A FORWARD CONTRACT?

A foreign exchange forward contract is a contractual agreement between two counterparties to exchange a fixed amount of one currency for a fixed amount of another currency on a specific date(s) in the future. The relationship between the two currency amounts is determined by the exchange rate set on the day the contract is entered into (trade date). The date on which the actual exchange takes place (settlement) is the value date.



• ABC Company is expecting to receive a payment in CAD on March1, 2012

• Payment amount C$ 100,000

• Current market rates:• Spot rate 1.0065

• Forward points .0002 (’2 points’)

• All-in rate 1.0067

FORWARD EXAMPLE

Forward Points: Compensation for the interest rate differential in the home countries (U.S. vs. Canada) of the currencies. If the Canadian interest rates are higher than those in the U.S., the person holding the USD should be compensated by the person holding the CAD.



• Cash Flow

• No cash flow impact

• Cash Flow

• - C$ 100,000

• + $99,334.46

FORWARD CASH FLOWS

• February 10, 2012 (trade date)

• ABC Company enters into a contract today to sell

• C$100,000 for value March 1, 2012 at a rate of 1.0067

• March 1, 2012 (value date)

• ABC Company delivers CAD

• ABC Company account credited

• US dollars C$100,000 @ 1.0067

Note: The transaction is settled at the forward rate, which is equal to the spot rate +/- the forward points. In this case, the forward rate is 1.0065 + .0002 = 1.0067



• Window Option (also known as a Window Forward)

• Allows a company to draw upon the forward contract, partial or in whole, within a specific timeframe no longer than a 1 year window

• Any balance may be “rolled over “ into a new contract or liquidated at prevailing market rates

• Enables importers/exporters to adjust for potential delays in receipts or payments

WINDOW OPT ION



• The company is on the hook. This is insurance, not speculation. Forwards, not Futures.

• Also, there is a credit risk component.

A COUPLE WORDS OF CAUT ION…


FORE IGN TRADE TOOLS



• Trade Finance:• Trade Letters of Credit

• Standby Letters of credit

• Bankers Acceptance Financing

• Documentary Collections

WHAT IS “TRADE F INANCE”?



• Trade / Commercial• Import or Export

• Standby• Performance

• Financial

TYPES OF LETTERS OF CRED IT?



• Trade / Commercial LC• This LC is expected to be drawn on

• Acts as the means for payment and exchange of title documents

• Generally used for cross border movement of goods

• Considered lower risk than a Standby as it is self liquidating and secured by the underlying goods

WHAT IS THE D IFFERENCE?



• Standby LC• Acts as security in the event something goes wrong

• Covering leasing payments, performance under a contract, non payment of invoices, bid on a project, etc.

• Higher risk than a commercial LC• Often open for a year or more

• Drawn on when our borrower has failed to perform

WHAT IS THE D IFFERENCE?



To the Importer:

• Documentary evidence that the ordered goods have been shipped on time

• Assurance that necessary clearance documents will be provided

• Payment deferred until goods are shipped and documents presented

WHAT ARE THE ADVANTAGES OF A TRADE LETTER OF CRED IT?



To the Exporter:

• Payment protection

• Reliance on issuing bank’s credit rather than buyer’s

• Rapid, local source of repayment, if payable at a U.S. bank

WHAT ARE THE ADVANTAGES OF A TRADE LETTER OF CRED IT?



To the Beneficiary:

• Easy access to compensation in the event the applicant defaults or fails to perform

• Reliance on issuing bank’s credit rather than Applicant

• Simple requirements to draw

WHAT ARE THE ADVANTAGES OF A STANDBY LETTER OF CRED IT?



To the Applicant:

• Eliminates the need to provide cash security

• Beneficiary must present a draw request that can be used in court if the drawing is unwarranted

• Can be used to facilitate business on an ongoing basis with one letter of credit

WHAT ARE THE ADVANTAGES OF A STANDBY LETTER OF CRED IT?



WHAT IS A DOCUMENTARY COLLECT ION?

A Documentary collection is the collection by a bank of funds due from a buyer against the delivery of documents.

The bank, acting as agent for the seller (exporter), presents documents to the buyer (importer) through that party's bank and in exchange receives payment of the amount owed, or obtains acceptance of a time draft for payment at a future date.

The liability of the bank under a documentary collection is primarily restricted to following the seller's instructions in forwarding and releasing documents against payment or acceptance.



• Unlike a letter of credit, the bank does not assume any liability to pay if the buyer does not want or is unable to pay

• Compared to open account sales, the documentary collection offers more security to the seller, but less than a letter of credit

H O W I S D O C U M E N TA RY C O L L E C T I O N D I F F E R E N T F R O M A N L / C O R O P E N A C C O U N T ?



• Simple and inexpensive handling compared to letters of credit

• Often faster receipt of payment than open account terms

• Seller retains title to the goods until payment or acceptance is made

WHAT ARE THE ADVANTAGES OF A DOCUMENTARY COLLECT ION?



• If the buyer refuses or is unable to pay, the seller has three options, which could be expensive:

• Find another buyer

• Pay for return transportation

• Abandon the merchandise

WHAT ARE THE D IS ADVANTAGES OF DOCUMENTARY COLLECT ION?



• Documents against Payment (D/P) also known as "Sight Draft" or "Cash against Documents” (CAD). The buyer must pay before the collecting bank releases the title documents.

• Documents against Acceptance (D/A). The buyer accepts a time draft, promising to pay for the goods at a future date. After acceptance, the title documents are released to the buyer.

WHAT TYPES OF DOCUMENTARY COLLECT IONS ARE THERE?



1. The buyer (importer) and seller (exporter) agree on the terms of sale, shipping dates, etc., and that payment will be made on a documentary collection basis.

2. The exporter arranges for the delivery of goods to the port/airport of departure.

3. Export documents and instructions are delivered to the exporter's bank by the exporter.

4. Following the instructions of the exporter, the bank processes the documents and forwards them to the buyer's bank.

5. The buyer's bank, on receipt of documents, contacts the buyer and requests payment or acceptance of the trade draft.

6. After payment or acceptance of the draft, documents are released to the buyer, who utilizes them to pick up the merchandise.

7. The buyer's bank remits funds to the seller's bank or advises that the draft has been accepted.

8. On receipt of good funds, seller's bank credits the account of the exporter.

WHAT ARE THE STEPS IN DOCUMENTARY COLLECT ION?



1. The contract is made between the importer and the exporter 2. The exporter sends the documents to his bank with instructions for delivery 3. The exporter's bank sends the documents to the importer's bank with instructions

that the documents can be handed over against payment or acceptance of a draft 4. The importer's bank hands the documents over to the importer when the conditions

have been fulfilled5. The exporter receives payment

THE COLLECT ION PROCESS



WHAT I F SH IPMENT IS BY A IR FRE IGHT?

An Air Waybill (AWB) is a straight consignment; it is not negotiable. The buyer does not need the AWB to pick up the goods. In other words, the buyer can obtain the merchandise without paying for it.

To avoid this possibility, when shipping by air, the AWB should always be consigned to the buyer's bank. This prevents release of the merchandise until such time as the buyer's bank issues an Air Release to the carrier. This is done only after the buyer has made payment or accepted the draft.


Q U E S T I O N A N D A N S W E R T I M E

T H A N K Y O U F O R AT T E N D I N G !



TYP ICAL CURRENC IES TRADEDC U R R E N C I E S W E C A N T R A D E



TOM BEUBE

Tom Beube is Director of International Services at Wintrust Financial Corp. Tom joined Wintrust in November of 2010 after spending 17 years with LaSalle Bank, ABN AMRO Bank and Bank of America. He began his banking career with The First National Bank of Chicago. During his time with ABN AMRO he spent four years working in Asia. Three of those years were in Hong Kong and one in Shanghai where he worked with multinational clients doing business in China, as well as calling on Financial Institutions in the Asia Pacific region.

Tom is a graduate of the University of Iowa and currently resides in the Chicago area with his wife and two children.

[email protected]




Sarah E. Grooms, CTP is a Vice President at Town Bank and has been with the bank for eleven years. Sarah joined the staff of Town Bank in May of 2001. Sarah graduated from Carroll University with a Bachelors Degree in Business-Finance. In 2005, Sarah completed the WBA’s Graduate School of Banking at UW-Madison, and has additionally earned her Certified Treasury Professional (CTP) designation in order to best assist clients. She is currently working on her Masters of Science in Applied Economics at Marquette University with a specialization in International Business.

Sarah has spoken previously for TMANE (Boston), Windy City Summit (Chicago), BizTech (Milwaukee), and the InBusiness Series (Madison) in addition to area colleges, as well as appearing on “InBusiness Radio with Jody and Joan” and Fox6 News - Milwaukee. She is a 2012 Forty Under 40 recipient (Business Journal, Milwaukee). She is a member of the AFP and WTMA and serves on the boards of the LIFE Charter School, Tempo-Waukesha and The Women’s Center. She currently resides near Milwaukee, WI with her husband and son.

[email protected]

S ARAH E . GROOMS, CTP
