FX ProjectBarramundi Cycling Company

Timothy Cahyadi, Victor, Monique, CynthiaSan Ramon, CA | 08/12/2016

Situation/Challenge

3

Case Debrief

• Barramundi Cycling Company – Location: Berkeley, CA

– CEO: Adam Munguia

• Conditions– Ensure 25% profit margin

– Provide Inventory for 10 Northern California stores

– 50% of payment due now

– Remaining 50% of payment due 60 days after delivery (October 1st)

• Service needed– Foreign Exchange Advice between AUD/USD

– Hedge the risk for import payments

Mitigating Counterparty Risk

Indirect Guarantee

Direct Guarantee

Comparison

Factors Indirect Guarantee Direct Guarantee

Costs & Fees

• More expensive• Fees would be charged

by BOW to client, taxes

• Less expensive• No fees, no cost charged

to client from BOW

Importer’s Risk

• More protection due to guarantee received from U.S. bank for the importer

• Risk is situational, depends on stability of foreign bank

8

Direct Guarantees

• Applicable to first 50% payment • Ensures the buyer receives a refund if supplier fails to

deliver goods (bikes) to buyer

Advance Payment

Guarantee

• Applicable to remaining 50% payment • Ensures buyer receives a refund if the delivered goods do

not meet certain performance expectations• Valid until 6 months after delivery date• Recourse on faulty product or incorrect shipped inventory

Performance Guarantee

Currency Hedging

10

Currency Hedging

Why Currency Hedging is important

• Increase certainty when determining returns of investment by mitigating the risk from fluctuating rate changes

How It Works

• Forward Contract• Allows purchaser to lock in an exchange rate to buy currency at future exercise date • Most cost efficient and conservative way to hedge • Simple and straightforward• Low transaction cost

Recommendations

• Forward Contract• Paying with AUD to maximize cost efficiency

Payment

12

Revolver

• A revolver is a line of credit that allows customer to use funds when needed. Balance is carried from month to month.

• Example: Spend $1000, repay $300 and carry over to the next month a

balance of $700 plus interest. Next month spend $1000, repay $400, carry over to the next month a balance of $1,300 plus interest.

• Bank of the West Revolver Product:– Available up to $20,000,000

– Interest: 2% rate annually continuous compounded

13

June 2nd

July

August

September 1st

October 3th

November 1st

December 1st

Note:• The rate has taken into account the bank fee• Details see the appendix

Pay required 50% of total payment with the spot

rate of 0.723 on 6/2/2016

Pay remaining 50% of total payment

Payment Scheme Option 1

Exercise date 09/01/2016 10/03/2016 11/01/2016 12/01/2016Forward Period 3M 4M 5M 6MForward Rate 0.718732 0.720089 0.719442 0.718814

14

June 2nd

July

August

September 1st

October 3th

November 1st

December 1st

Note:• The rate has taken into account the bank fee• Details see the appendix

Pay required 50% of total payment with the spot

rate of 0.723 on 6/2/2016

Pay 12.5% of total payment

Pay remaining 37.5% of total payment

Payment Scheme Option 2

Exercise date 09/01/2016 10/03/2016 11/01/2016 12/01/2016Forward Period 3M 4M 5M 6MForward Rate 0.718732 0.720089 0.719442 0.718814

15

Total Cost

• Option 1 offers total cost of $12,133,131;• Option 2 offers total cost of $12,133,302, with a difference of $172

Exercise date 09/01/2016 10/03/2016 11/01/2016 12/01/2016Forward Period 3M 4M 5M 6MForward Rate 0.718732 0.720089 0.719442 0.718814

Inputs Date Market rate Bank Fee Actual Payment RateUSD/AUD 06/02/2016 0.723 35 bps 0.7265

Date Amount Total CostOption 1 06/02/2016 USD 6,084,437.50

12/01/2016 USD 6,048,693 12,133,131$

Option 2 06/02/2016 USD 6,084,437.5009/01/2016 USD 1,512,34512/01/2016 USD 4,536,520 12,133,302$

Difference 172$

Why Payments on a Later Date Saves More Money

16

AUDUSD Historical Correlation with 1) U.S. economy presented by S&P 500 Index, U.S. Unemployment rate 2) Other major currencies (EURUSD)

US Unemployment

S&P 500

AUDUSD Moving Weighted Average

EURO Currency Trust

AUDUSD Historical Monthly Closed Rates (As of June 2nd, 2016)

Recommendation

18

Recommendation

• Use Forward Contract• Taking into account all risk factors and their potential impact on your business, we

recommend Payment Scheme Option 1 because it minimizes client’s credit and total payment exposures, especially when client hasn’t generated sales

• Direct Guarantees:– Advanced Payment Guarantee

– Performance Guarantee

June 2nd

July

August

September 1st

October 3th

November 1st

December 1st

Pay required 50% of total payment with spot rate of 0.723

on 6/2/2016

Pay remaining 50% of total payment at the

rate of 0.718814

Exercise date 09/01/2016 10/03/2016 11/01/2016 12/01/2016Forward Period 3M 4M 5M 6MForward Rate 0.718732 0.720089 0.719442 0.718814

19

Pricing

• Target: 25% Profit Margin

• Cost per bike unit takes into account the best payment scheme (Option 1)– With a total payment of USD12,133,131

• The gross profit margin aligns with the average margin sales on bikes among U.S. bike dealers from the National Bicycle Dealers Association (NBDA)

• Total cost includes operating costs, depreciation and amortization and tax (10% of taxable income)

• Estimated profit margin for each type of bicycle roughly exceeds the 25% target

per unit R100 R200 R500 R1000Revenues/ sales price 949.00$ 1,549.00$ 2,749.00$ 9,049.00$ COGS/ Cost per unit 542$ 903$ 1,625$ 5,417$

Gross Profits 407.33$ 646.21$ 1,123.98$ 3,632.26$ Gross Profits Margin 43% 42% 41% 40%

Total Cost (Inc. Tax) 140.42$ 210.55$ 350.82$ 1,087.23$ Profit 266.91$ 435.66$ 773.16$ 2,545.03$ Profit Margin 28% 28% 28% 28%

20

Resources/References Used

Online Sources Investopedia http://www.investopedia.com/terms/c/currencyforward.asp XE http://www.xe.com/currency/aud-australian-dollar Dailyfx https://www.dailyfx.com/aud-usd Yelp https://www.yelp.com City of Berkeley http://berkeley.cityapplications.com National Bicycle Dealers Association http://nbda.com/

External Sources Adam Munguia Aditya Prakash Andres Bergero Ian Broff (SF office) Ritwik Roy

Q&A

21

Appendix

22

23

Appendix

Loan Balance & Payment Details

Total amount due AUD 16,750,000.00Revolver rate* 2%1st Payment 06/02/2016Effective Currency Rate 0.7265

% of Total Payment 50%Amount USD 6,084,437.50

2nd Payment 12/01/2016Effective Currency Rate 0.722232

% of Total Payment 50%Amount USD 6,048,693

Total USD 12,133,130.50 USD 12,215,304.880.68%

30 USD 6,048,693.00 USD 6,058,782.56

ERR

Assumption: Pay all the revolver loan balance by Dec 31, 2016Days to Maturity Initial Loan Amount Loan Balance at Maturity Date

212 USD 6,084,437.50 USD 6,156,522.32

*The revolver annual rate is compounded continuously.

24

Appendix0M 6M 5M 4M 3M

0.7265 0.722232 0.723589 0.722942 0.7223141 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,141,654$ 1 Second 12.50% -$ 1,512,173$ -$ -$ -$ 1 Third 37.50% -$ -$ 4,545,043$ -$ -$ 2 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,137,590$ 2 Second 12.50% -$ 1,512,173$ -$ -$ -$ 2 Third 37.50% -$ -$ -$ 4,540,979$ -$ 3 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,133,646$ 3 Second 12.50% -$ 1,512,173$ -$ -$ -$ 3 Third 37.50% -$ -$ -$ -$ 4,537,035$ 4 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,135,972$ 4 Second 12.50% -$ -$ 1,515,014$ -$ -$ 4 Third 37.50% -$ 4,536,520$ -$ -$ -$ 5 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,140,431$ 5 Second 12.50% -$ -$ 1,515,014$ -$ -$ 5 Third 37.50% -$ -$ -$ 4,540,979$ -$ 6 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,136,487$ 6 Second 12.50% -$ -$ 1,515,014$ -$ -$ 6 Third 37.50% -$ -$ -$ -$ 4,537,035$ 7 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,134,617$ 7 Second 12.50% -$ -$ -$ 1,513,660$ -$ 7 Third 37.50% -$ 4,536,520$ -$ -$ -$ 8 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,143,141$ 8 Second 12.50% -$ -$ -$ 1,513,660$ -$ 8 Third 37.50% -$ -$ 4,545,043$ -$ -$ 9 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,135,132$ 9 Second 12.50% -$ -$ -$ 1,513,660$ -$ 9 Third 37.50% -$ -$ -$ -$ 4,537,035$ 10 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,133,302$ 10 Second 12.50% -$ -$ -$ -$ 1,512,345$ 10 Third 37.50% -$ 4,536,520$ -$ -$ -$ 11 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,141,826$ 11 Second 12.50% -$ -$ -$ -$ 1,512,345$ 11 Third 37.50% -$ -$ 4,545,043$ -$ -$ 12 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,137,762$ 12 Second 12.50% -$ -$ -$ -$ 1,512,345$ 12 Third 37.50% -$ -$ -$ 4,540,979$ -$ 13 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,138,813$ 13 Second 25% -$ 3,024,347$ -$ -$ -$ 13 Third 25% -$ -$ 3,030,029$ -$ -$ 14 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,136,104$ 14 Second 25% -$ 3,024,347$ -$ -$ -$ 14 Third 25% -$ -$ -$ 3,027,320$ -$ 15 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,133,474$ 15 Second 25% -$ 3,024,347$ -$ -$ -$ 15 Third 25% -$ -$ -$ -$ 3,024,690$ 16 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,138,813$ 16 Second 25% -$ -$ 3,030,029$ -$ -$ 16 Third 25% -$ 3,024,347$ -$ -$ -$ 17 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,141,786$ 17 Second 25% -$ -$ 3,030,029$ -$ -$ 17 Third 25% -$ -$ -$ 3,027,320$ -$ 18 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,139,156$ 18 Second 25% -$ -$ 3,030,029$ -$ -$ 18 Third 25% -$ -$ -$ -$ 3,024,690$ 19 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,136,104$ 19 Second 25% -$ -$ -$ 3,027,320$ -$ 19 Third 25% -$ 3,024,347$ -$ -$ -$ 20 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,141,786$ 20 Second 25% -$ -$ -$ 3,027,320$ -$ 20 Third 25% -$ -$ 3,030,029$ -$ -$ 21 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,136,447$ 21 Second 25% -$ -$ -$ 3,027,320$ -$ 21 Third 25% -$ -$ -$ -$ 3,024,690$ 22 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,133,474$ 22 Second 25% -$ -$ -$ -$ 3,024,690$ 22 Third 25% -$ 3,024,347$ -$ -$ -$ 23 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,139,156$ 23 Second 25% -$ -$ -$ -$ 3,024,690$ 23 Third 25% -$ -$ 3,030,029$ -$ -$ 24 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,136,447$ 24 Second 25% -$ -$ -$ -$ 3,024,690$ 24 Third 25% -$ -$ -$ 3,027,320$ -$ 25 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,151,003$ 25 Second 25% -$ 3,024,347$ -$ -$ -$ 25 Third 0 -$ -$ -$ -$ -$

TotalT PaymentPayment Scheme

PaymentSpot/Forward rates

25

Appendix0M 6M 5M 4M 3M

0.7265 0.0035 0.0035 0.0035 0.003526 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,156,685$ 26 Second 25% -$ -$ 3,030,029$ -$ -$ 26 Third 0% -$ -$ -$ -$ -$ 27 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,153,976$ 27 Second 25% -$ -$ -$ 3,027,320$ -$ 27 Third 0% -$ -$ -$ -$ -$ 28 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,151,346$ 28 Second 25% -$ -$ -$ -$ 3,024,690$ 28 Third 0% -$ -$ -$ -$ -$ 29 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,153,844$ 29 Second 12.50% -$ 1,512,173$ -$ -$ -$ 29 Third 12.50% -$ -$ 1,515,014$ -$ -$ 30 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,152,489$ 30 Second 12.50% -$ 1,512,173$ -$ -$ -$ 30 Third 12.50% -$ -$ -$ 1,513,660$ -$ 31 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,151,174$ 31 Second 12.50% -$ 1,512,173$ -$ -$ -$ 31 Third 12.50% -$ -$ -$ -$ 1,512,345$ 32 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,153,844$ 32 Second 12.50% -$ -$ 1,515,014$ -$ -$ 32 Third 12.50% -$ 1,512,173$ -$ -$ -$ 33 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,155,331$ 33 Second 12.50% -$ -$ 1,515,014$ -$ -$ 33 Third 12.50% -$ -$ -$ 1,513,660$ -$ 34 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,154,016$ 34 Second 12.50% -$ -$ 1,515,014$ -$ -$ 34 Third 12.50% -$ -$ -$ -$ 1,512,345$ 35 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,152,489$ 35 Second 12.50% -$ -$ -$ 1,513,660$ -$ 35 Third 12.50% -$ 1,512,173$ -$ -$ -$ 36 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,155,331$ 36 Second 12.50% -$ -$ -$ 1,513,660$ -$ 36 Third 12.50% -$ -$ 1,515,014$ -$ -$ 37 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,152,661$ 37 Second 12.50% -$ -$ -$ 1,513,660$ -$ 37 Third 12.50% -$ -$ -$ -$ 1,512,345$ 38 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,151,174$ 38 Second 12.50% -$ -$ -$ -$ 1,512,345$ 38 Third 12.50% -$ 1,512,173$ -$ -$ -$ 39 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,154,016$ 39 Second 12.50% -$ -$ -$ -$ 1,512,345$ 39 Third 12.50% -$ -$ 1,515,014$ -$ -$ 40 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,152,661$ 40 Second 12.50% -$ -$ -$ -$ 1,512,345$ 40 Third 12.50% -$ -$ -$ 1,513,660$ -$ 41 First payment 100% 12,168,875.00$ -$ -$ -$ -$ 12,168,875$ 41 Second 0 -$ -$ -$ -$ -$ 41 Third 0 -$ -$ -$ -$ -$ 42 First payment 87.5% 10,647,766$ -$ -$ -$ -$ 12,159,939$ 42 Second 12.5% -$ 1,512,173$ -$ -$ -$ 42 Third 0.0% -$ -$ -$ -$ -$ 43 First payment 87.5% 10,647,766$ -$ -$ -$ -$ 12,162,780$ 43 Second 12.5% -$ -$ 1,515,014$ -$ -$ 43 Third 0.0% -$ -$ -$ -$ -$ 44 First payment 87.5% 10,647,766$ -$ -$ -$ -$ 12,161,425$ 44 Second 12.5% -$ -$ -$ 1,513,660$ -$ 44 Third 0.0% -$ -$ -$ -$ -$ 45 First payment 87.5% 10,647,766$ -$ -$ -$ -$ 12,160,111$ 45 Second 12.5% -$ -$ -$ -$ 1,512,345$ 45 Third 0.0% -$ -$ -$ -$ -$ 46 First payment 50.0% 6,084,438$ -$ -$ -$ -$ 12,133,131$ 46 Second 50.0% -$ 6,048,693$ -$ -$ -$ 46 Third 0.0% -$ -$ -$ -$ -$ 47 First payment 50.0% 6,084,438$ -$ -$ -$ -$ 12,144,495$ 47 Second 50.0% -$ -$ 6,060,058$ -$ -$ 47 Third 0.0% -$ -$ -$ -$ -$ 48 First payment 50.0% 6,084,438$ -$ -$ -$ -$ 12,139,077$ 48 Second 50.0% -$ -$ -$ 6,054,639$ -$ 48 Third 0.0% -$ -$ -$ -$ -$ 49 First payment 50.0% 6,084,438$ -$ -$ -$ -$ 12,133,817$ 49 Second 50.0% -$ -$ -$ -$ 6,049,380$ 49 Third 0.0% -$ -$ -$ -$ -$

Payment Scheme

T Payment Spot/Forward ratesPayment

Total

26

Appendix

Payment SchemePrice Tag Starting Date Spot Rate Actual Payment RateAUD 16,750,000 06/02/2016 0.723 0.7265Option 1

% to the total Payment 06/02/2016 09/01/2016 10/03/2016 11/01/2016 12/01/2016 Total Payment Effective Currency Rate % of Saving Amount of SavingFirst payment 50.0% USD 6,084,437.50 USD 0 USD 0 USD 0 USD 0Second 50.0% USD 0.00 USD 0 USD 0 USD 0 USD 6,048,693Option 2

% to the total Payment 06/02/2016 09/01/2016 10/03/2016 11/01/2016 12/01/2016 Total Payment Effective Currency Rate % of Saving Amount of SavingFirst payment 50.0% USD 6,084,437.50 USD 0 USD 0 USD 0 USD 0Second 12.5% USD 0.00 USD 1,512,345 USD 0 USD 0 USD 0Third 37.5% USD 0.00 USD 0 USD 0 USD 0 USD 4,536,520

Comparison Pay full on June 2ndNote: The price tag multiplied by June 2nd effective rate USD 12,168,875

USD 35,7440.29374%0.724366USD 12,133,131

0.29233% USD 35,573USD 12,133,302 0.72437625

FX Project ProductsAmount Price in AUD

Team Victor R100 1500 750$ Timothy R200 2000 1,250$ Monique R500 2500 2,250$ Andy R1000 1000 7,500$ Cynthia Total Cost

Inputs Date Market rate Bank Fee Actual Payment RateUSD/AUD 06/02/2016 0.723 35 bps 0.7265

Date Amount Total CostOption 1 06/02/2016 USD 6,084,437.50

12/01/2016 USD 6,048,693 12,133,131$

Option 2 06/02/2016 USD 6,084,437.5009/01/2016 USD 1,512,34512/01/2016 USD 4,536,520 12,133,302$

Difference 172$

THANK YOUBank of the West2016 Internship Program