Washington, DC1201 New York Ave NW | Suite 300Washington, DC  20005800.843.2497

Los Angeles8383 Wilshire Blvd | Suite 330Beverly Hills, CA  90211855.606.8346

New York385 Fifth Avenue | Suite 1500New York, NY  10016855.778.2022

www.TempusFX.com

Proud member of

NASBITE Hedging Foreign Currency Risk in

International Trade & Future Developments

April 11, 2019

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Today’s Agenda

Foreign Exchange (FX) Volatility

Why FX Volatility Matters

Why Exporters Should Consider FX

FX Hedging Terminology

FX Hedging Case Studies

Future International Trade Trends

FX Resources

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Foreign Exchange (FX) Volatility - what it is and what causes it

FX Volatility:  Fluctuations in Value between two different currencies

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Foreign Exchange (FX) Volatility - Big Jolts Too

Swiss National Bank abandoned Euro peg in

Jan 2015 - Swiss franc strengthened 30%

UK Brexit vote in June 2016 drove GBP

down 10% in one day, a 31 year low

Mexican election June 2018 – MXN peso

down 16%

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British Pound (GBP) Volatility 2018

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Pound dropped -13% in 2018 against USD

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British Pound (GBP) Volatility Q1 2019

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Pound moved +6% against USD in Q1 2019

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EURO (EUR) Volatility 2018

EUR moved -10.3% against USD in 2018

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EURO (EUR) Volatility Q 1 2019

EUR -3% movement against USD in Q1 2019

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Other Currencies in 2018 Dollar Gains

+9.3%

+15.9%

+11.1%

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Other Currencies in Q1 2019 Dollar Gains

+3.9%

‐4.0%

‐3.8%

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Foreign Exchange (FX) Volatility – why it matters

FX volatility, if not mitigated, may eat

into companies’ bottom-line profits

Importers that pay overseas suppliers

in FX have increasing costs if US

dollar weakens

Exporters receiving FX have declining

profit if US dollar strenghtens

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FX Exposure in Import / Export Transactions

USD

• Good for US Importers…foreign goods less expensive

• Bad for Exporters…US goods more expensive for foreign buyers

1.10

1.05

1.15

1.20

• Bad for US Importers…foreign goods more expensive

• Good for Exporters…US goods less expensive for foreign buyers

Rate

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Lego Negatively Impacted by FX Volatility

January to June 2018 Results

“Net profit fell 10% to three billion Danish kroner ($468 MM), while Sales declined 4.6% to 14.2 billion kroner. The company attributed much of that weakness to currency moves. The US dollar weakened significantly against the kroner during the period, reducing Lego’s overseas sales after being converted into its home currency. Excluding foreign exchange moves, revenue was flat for the first six months of the year.”

September 5, 2018Page B3

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FX Volatility – #1 Cause of Negative Impact on Corp Earnings

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Why Exporters Should Consider Invoicing in both US$ & FX

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Managing FX Risk: Hedging

Toolbox to manage FX Risk: 

• Fixed Date Forwards

• Window Forwards

• Market Orders

• Spot 

• Holding Balances

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Hedging is simply Insurance to protect profit margins

• Would you drive your car without insurance?

• Would you buy a house without insurance?

Hedging Foreign Currency Risk is a prudent tactic to protect profit margins

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Focus on your company’s business not speculate on FX

Is your job to bet on foreign currency markets…

…or is it to protect your company’s profit margin?

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Hedging Terminology – Fixed Dated Forward

Fixed Date Forward • Binding contract to Buy/Sell currency at a rate set today• Forward points added• Future delivery out to 12 months on a specific date:

– EUR 100,000 @ 1.1823 Value Date December18, 2019

Advantages• Set FX rate today and take delivery in future • Secure profit margins by knowing exact cost of FX today• Preserve cash flow until value date• No fee to book a Fixed Date Forward

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Hedging Terminology – Fixed Date Forward In Action

Useful when exact amount and value date are certain

EUR 100,000  Fixed Date Forward booked today @ 1.1300 with Value date of Nov 31 

November 31 client takes delivery of EUR 100,000 and pays USD 113,000

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Hedging Terminology – Window Forward

Window Forward • Binding contract to Buy/Sell currency at a rate set today• Forward points added• Future delivery out to 12 months• Draw funds multiple times/amounts in a defined “Window”:

– EUR 100,000 @ 1.1901 between Oct 31 and Dec 30, 2019

Advantages• Set FX rate today and take delivery in future• Secure profit margins by knowing exact cost of FX• Match cash flow to exact time FX is needed• Flexibility to draw funds multiple times to match needs• No fee to book a Window Forward

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Hedging Terminology – Window Forward In Action

Flexibility to draw funds multiple times & in varying amounts to match needs

EUR 100,000  Window Forward booked today @ 1.1500 with Final Value Dec 31 and three month window opening Oct 1st 

October 10th client takes delivery (“drawdown”) of EUR 20,000 and pays USD 23,000

November 15th client takes delivery of EUR 10,000 and pays USD 11,500

December 17th client takes delivery of EUR 30,000 and pays USD 34,500

December 30th client takes final delivery of EUR 40,000 and pays USD 46,000

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Hedging Terminology – Par Forward

Par Forward• Series of forwards with different settlement dates but a

common exchange rate – i.e. EUR 1.1456 for all forwards

Advantages• Simplified / streamlined accounting• Set FX rate today and take delivery in future• Secure profit margins by knowing exact cost of FX• Preserve cash flow until value date• No fee to book a Par Forward

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Hedging Terminology – Forwards

PremiumThe amount by which the forward price exceeds the Spot price

Value DateAlso referred to as the maturity date. The delivery date of funds traded; for spot trades it is normally two days after the transaction date. Forwards may have value dates out to 12 months. Most forwards are typically out to 6 months.

Forward Deposit (Margin)Portion of Forward placed on deposit at time forward is booked. Ranges from 4% to 15% depending on forward value date. • 0 to 3 months 4% 5%• 3 to 6 months 6% 10%• 6 to 12 months 8% 15%Credit lines may be used for forward deposits – if company qualifies.

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Hedging Terminology – Forwards Continued

Drawdown To pull FX funds from a total amount either in part of in full

ExposureAmount a company stands to lose in a FX position

Forward Points Pips, based on interest rate differentials, added to or subtracted from the current exchange rate in order to calculate a forward price• Spot 1.1500 Forward 1.1525 (25 Forward points)

Hedge Ratio Value of a position protected through the use of a hedge compared with the size of the entire position itself. I.e. 50%, 75% or 100%

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Hedging Terminology – Market Order

Market Order (aka “Standing Order”)FX risk management tool used to place a buy or sell order once the Spot rate reaches a pre-defined level. Valid 24 x 7

Stop Loss Order to buy / sell at a pre-defined level in order to limit a lossEUR at 1.17….Set a Stop Loss Market order for 1.19

Take Profit Order to buy / sell at a pre-defined level in order to secure a profitEUR at 1.17….Set a Take Profit Market order for 1.15

One Cancels Other (“OCO”)Combination of both a Stop Loss and Take Profit order. If either rate is achieved the other market order is automatically cancelled

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WINDOW FORWARD

Case Study #1:Receiving Foreign Funds

A seafood distributer based in 

New York was contracted to 

supply a few chain restaurants in 

Canada with fresh seafood. The 

contract was negotiated in 

Canadian dollar (CAD), meaning 

the US‐based client would receive 

264,000 CAD over the course of 9 

months. The client expected to 

receive 25% within 4 months and 

the remaining 75% no later than 

10 months. 

ChallengeThe client had surplus capital and did not anticipate needing to use the funds until 2 months after receiving them. Therefore, the client wanted to ensure that they received max value for their CAD before converting to USD.

StrategyIn order to help the company maximize their return, a strategy was drawn up which involved using 2 window forwards with a delayed open date to repatriate the funds back to USD.

– 66,000 CAD (25%) Window forward opening in 3 months and closing 5 months out

– 198,000 CAD (75%) Window forward opening in 9 months and closing 11 months out

Outcome• Pushing back the open date on the Window forwards 

allowed the client to take advantage of the interest rate differentials between USD and CAD and to gain a better exchange rate

• The client maximized their USD receivables versus converting at the current bid‐side Spot price 

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WINDOW FORWARD – In Action

Case Study #1:Receiving Foreign Funds

A seafood distributer based 

in New York was contracted 

to supply a few chain 

restaurants in Canada with 

fresh seafood. The contract 

was negotiated in Canadian 

dollar (CAD), meaning the 

US‐based client would 

receive 264,000 CAD over the 

course of 9 months. The 

client expected to receive 

25% within 4 months and the 

remaining 75% no later than 

10 months. 

Client books two window forwards now to Sell:• CAD 68K @ 1.32 – Opens 3 months closes 5 months• CAD 198K @ 1.34 – Open 9 months closes 11 months

• Month 4 CAD 68,000 received and client converts to get USD 51,515

• Month 10 CAD 198,000 received and client converts to get USD 147,761

Alternative is to do nothing and then sell CAD at Spot rate when it is received: 

• Spot @ 1.34 at month 4 converts to USD 50,746

• Spot @ 1.36 at month 10 converts to USD 145,588 

Gain:  USD 2,942 by using Window Forwards vs. Spot

Window Forwards help exporter by improving their overall profit margin

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MARKET ORDER & WINDOW FORWARD

Case Study #2:Optimistic Outlook

An antiques dealer based in 

Georgia has followed news 

surrounding the Brexit

referendum election in Britain. 

Through Tempus’ insights, the 

client came to understand that the 

British pound (GBP), and by 

extension the company’s budget, 

was poised to be strongly 

impacted by the results of the 

election.

ChallengeThe client estimated their currency exposure for the year. The client believed the rate would move in their favor and wanted to capitalize on a positive market move, but did not want to tie up the company’s cash flow in purchasing the funds in full. 

StrategyAfter evaluating the company’s risk tolerance it was decided to use a combination of take‐profit and stop‐loss market orders.

– 55,000 GBP (100%) Take‐profit and Stop‐loss market orders

– 55,000 GBP (100%) Window forward opening after the market order hits and closing 12 months out

To avoid tying up the company’s cash flow once the market order hit, the order was rolled into a window forward for future delivery. This allows the client to drawdown the funds at the amount and time needed throughout the year.

Outcome• Combined strategy enabled client to take advantage of ideal FX 

rate saving money when the Take Profit market order hit• Preserved cash flow by rolling the Take Profit market order into 

a Window Forward for future delivery• Avoided massive market volatility ahead of Brexit election

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MARKET ORDER & WINDOW FORWARD – In Action

Case Study #2:Optimistic Outlook

An antiques dealer based in 

Georgia has followed news 

surrounding the Brexit

referendum election in 

Britain. Through Tempus’ 

insights, the client came to 

understand that the British 

pound (GBP), and by 

extension the company’s 

budget, was poised to be 

strongly impacted by the 

results of the election.

Client places Stop Loss & Take Profit Market orders.  GBP at 1.50 to USD.  Stop Loss at 1.55 and Take Profit at 1.35

Brexit Passes and Pound Collapses down to 1.31

Tempus buys GBP @ 1.35 on behalf of client

Client doesn’t need GBP immediately so GBP rolled into a window forward out to 12 months

Clients annual GBP is secured and as GBP is needed they drawdown the required amounts and pay at 1.35 rate throughout year

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Hedging Wrap Up

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International Trade— Future Directions

Change - Block chain, Smart contracts (IoC), Artificial Intelligence (AI), Machine Learning, Crypto Currencies, Open APIs, Internet of Things (IoT), and Real Time Payments

International Trade Evolving - Commonwealth Bank of Australia - Experiment shipping 17 tons of Almonds from Australia to Germany tracked on the platform including IoT, Smart contracts, and block chain

FinTech Disruptors - Tango Trade “Leverages block chain and smart contracts to enable SMEs to import and export with confidence” – Challenger to Bank LC services

Bank Consortium Partnerships - We Trade A consortium of 9 European Banks offering “Block chain based international trade platform and smart contracts” to facilitate European trade . Digital “one stop” shop for trade, finance, and payment based out of Dublin

GOALS:                           SPEED                  SECURITY       TRANSPARENCY           COST          FRICTION

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International Trade— Future Directions “Reality”

Crypto Currency – 2018 Price Collapse

75% Drop since December 2017!

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Int’l Trade - Future Directions: The Incumbents Respond

SWIFT – Launched Swift GPI to increase transparency into location of payment. Identifies “bottleneck” financial institutions. Payments now moving much faster.

Same Day ACH – Live for payments under $25,000. Expanding to $100,000 over next couple of years.

Banks – Launching own initiatives and partnering where it makes business sense. Backing technologies that show promise.

Digitization - Migration of all incumbents’ business processes and client experience to digital in order to streamline operations, reduce friction, and improve client retention

Incumbents are not waiting for “Challenger” FinTechs to displace them; they are pursuing their own innovation initiatives which incorporate elements of the new technologies

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Why SMEs should consider a Non-Bank FX Specialist vs. Bank

Market Insight – FX specialists dedicate extensive time and resource analyzing the currency markets and then sharing these insights with clients to help them time FX transactions – a key tactic to reduce the negative impact of volatility and lower costs.

Savings – Banks typically set a very high FX rate for SME clients – often double to triple what an FX specialist charges. Additionally, there is no room for an SME to negotiate the FX rate with the bank.

Technology – FX specialists focus on providing user-friendly, secure, and innovative client-facing technology whereas banks, with a much broader product range to support, have limited FX focus in their SME client facing systems.

Service - FX specialists offer more personalized service because of the focus exclusively on FX and international payments. Customer Dealers take the time to understand each clients’ business and then to craft specific FX solutions to meet client requirements.

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FX Hedging Videos Resource – Animated

Forward Video

Window Forward Video

Market Order Video

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FX Monthly Report – Resource to Interpret Currency Markets

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FX Market Monthly Report

Monthly FX Report

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FX Glossary – Keeping the jargon clear

Glossary of FX Terms

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WINDOW FORWARD

Case Study #3:Machinery Purchase, Limited Liquidity

A steel wire manufacturer based 

in Texas purchased a large piece of 

machinery from Germany for 

1,600,000 Euro. The vendor gave 

the client flexible payment terms 

over the course of one‐year: an

initial deposit of 10% was due, 

30% was due between 4‐6 

months, and the final 60% was 

due between 10‐12 months.

ChallengeThe rate of exchange was extremely favorable to the client at that point in time, but this was an especially large purchase for the client and they did not have the funds to purchase the machine outright. The client also wanted to figure out if there was any cost advantage to paying the invoice in foreign currency versus USD.

Outcome• The client locked in the favorable Spot & took advantage of Forward 

rates now for future delivery• Preserved cash flow to pay throughout the year vs. buying all at Spot • Saved an additional 4.0% by paying in EUR vs USD

StrategyAfter performing a cost comparison (USD v. EUR invoice amount) it was determined that the USD invoice was padded with an extra 4% ‐ common practice used to protect against currency risk.  Client bought Spot for initial deposit and phased the other two payments with Window Forwards

– 160,000 EUR (10%) Spot transaction– 480,000 EUR (30%) Window forward opening in 3 months and 

closing 6 months out– 960,000 EUR (60%) Window forward opening in 10 months and 

closing 12 months out

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PAR FORWARD

Case Study #4:Recurring Monthly Payments

A medical equipment supplier 

based in Nevada had to make 

structured payments of 11,500,000 

Japanese yen (JPY) every month to 

fund a new office in Japan. The 

client previously used a well‐known 

bank to manage their international 

wires, but found the bank to be 

reactive, as opposed to proactive, 

with little understanding of how 

their business actually operated. 

ChallengeFor accounting purposes, it was important for the client to pay the same US dollar (USD) amount for the 11,500,000 JPY they needed to send each month.  However, the client did not have the liquidity available to purchase the entire year’s worth of JPY into their holding account. 

StrategyIn order to help better manage the company’s budgets the client decided to hedge their annual exposure with Par forwards.

– 11,500,000 JPY (100%) 12 Par forwards closing at the beginning of each month for 12 months out

– Locked in total of 138,000,000 JPY

Outcome• Simplified accounting records• Took proactive control of budget• Locked in good rate now for future delivery throughout the year saving 

money• Preserved cash flow

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FIXED-DATE FORWARD

Case Study #5:Pre‐Priced Parts, Dollar Weakening

An automotive parts supplier 

based in Illinois placed an order 

for parts from their vendor in 

Mexico. The client negotiated the 

price for 8,900,000 Mexican peso 

(MXN) then priced the parts in US 

dollar (USD) for resale. Through 

our proactive monitoring of the 

situation and Tempus’ own 

forecasts, the client realized that 

the MXN showed little sign of 

reversing its strengthening trend 

against the USD. 

ChallengeThe full amount owed was due at a pre‐specified date 2 months out and the MXN had consistently strengthened against the USD, eating away at the client’s expected profit margins. The client didn’t have the cash on hand to buy the full 8,900,000 MXN outright.

Outcome• Protected remaining profit margin• Preserved cash flow until value date two months out• Established better pricing strategy for future business

StrategyIn order to protect the company’s remaining profit margin it was decided to use a fixed‐date forward, to avoid any potential further losses to the company’s profits that would arise from the MXN continuing its appreciation against the USD.

– 8,900,000 MXN (100% hedge) Fixed date forward valued at a pre‐determined date 2 months out

– Additionally, a reasonable and competitive product pricing strategy for future orders was implemented so that the client could maximize profitability for each unit sold while taking into account potential market rate fluctuations

Washington, DC1201 New York Ave NW | Suite 300Washington, DC  20005800.843.2497

Los Angeles8383 Wilshire Blvd | Suite 330Beverly Hills, CA  90211855.606.8346

New York385 Fifth Avenue | Suite 1500New York, NY  10016855.778.2022

www.TempusFX.com

Proud member of

Questions?

Andrew Woelflein, Chief Strategy Officerawoelflein@tempusfx.com

202.787.3460