foreign exchange risk management & cash flow at risk · tetra laval international highly...

Highly Confidential

Foreign exchange risk management &

Cash Flow at Risk

David Thilthorpe – Geneva 30th October, 2017

Highly ConfidentialTetra Laval International

The Tetra Laval Group

The role of Group Treasury

Foreign exchange risk management methodology

Cash Flow at Risk development & future plans

Content

Highly ConfidentialTetra Laval InternationalTetra Laval International

The Tetra Laval Group


Tetra Laval Group Board

Tetra Laval International

Tetra Laval GroupSupport Functions

Tetra Pak DeLaval Sidel

Three independent industry groups

Swedish origin –headquartered in Switzerland

Privately owned

Focus on technologies for efficient production, packaging and distribution of food

Swedish origin since 1951 –headquartered in Switzerland

Privately owned


Tetra Laval in summary

187 bn packages sold 2016 (Tetra Pak)

Net sales € 13.8 bn to more than 190 countries, 34,180 employees worldwide (Dec 2016)

Sidel : 1'435

DeLaval : 935

Tetra Pak : 11'435

Others : 10 Sales Sidel : 5'320

DeLaval : 4'450

Tetra Pak : 24'140

Others : 270

Employees

020,00040,00060,00080,000100,000120,000140,000160,000180,000200,000

'80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16


Operations

Operations

TaxesM&AHoldingsGFP&RFinanceAudit

Tetra Laval International - responsibilities

Strategy

Control &

Compliance

TLG Suppliers:

TP GIM, TLG HR

Board & Sub-Committees

Risk

Management

& Risk

Transfer

Group

FinancingReporting

Corporate Governance

Legal

StructuresM & A

Accounting

& Reporting

IT / IS

Ind

ustr

y G

rou

ps

Internal

3rd Party External Suppliers

Taxes


The Role of Group Treasury


Tetra Laval Group Treasury

Responsible for managing FX, interest rate, commodity risk, daily liquidity management

& financial counterparty risk

➢ All foreign exchange & interest rate risk are managed under risk

management policies and natural hedging opportunities

➢ Commodity risk managed together with Procurement, main

exposures are paper board, aluminium & polymers

➢ Most of FX exposure is based on annual pricing to customers, inter-

company netting scheme used to centralise risk at Treasury


Foreign exchange risk

management methodology


Strategy preparation methodology

Curre

ncy

Currency outlook,

event risk

Technical analysis

& speculative

positioning

2018 FX Flows

forecast &

historical

volatility

Hedge

Cost

Economic

Exposure

Result of Cash

Flow at Risk

Analysis including

forecast variation

Hedge Allocation

Sca

le

Hedge less

+ options

Hedge close

to 100%

forward

Neutral

Forward

Hedge less

+ options

Neutral

Forward

Hedge 100%

Forward

+

Over hedge

with option

Hedge close

to 100%

forward

Hedge close

to 100%

forward

Hedge less

+ open

Hedge less

+ options

Neutral

Forward

Neutral

Forward

negative

high

low

high

low High

low

• Lower fwd ratio

• Open position

• Options (PV and

zero cost)

• 95-100% fwd ratio

• Open position

• Zero cost options

• Close to 100% fwd

Over hedge with

options

positive

Usin

g C

Fa

RTo

ol to

de

fin

e o

ptim

al str

ate

gy

Factors taken into consideration to determine annual strategy

Highly Confidential


Bank forecasts for 2018

Bloomberg consensus as per June 13th

Outlook very close to current one year forward with the exception of SEK and BRL

Consensus Current spot 1Y fwd Q317 Q417 Q118 Q218 Q418Pos itive/

Negative Outlook Comments

EUR/USD 1.12 1.14 1.10 1.12 1.12 1.13 1.15 Positive Growth momentum in EUR, Trump impact less than expected

EUR/SEK 9.73 9.72 9.50 9.41 9.33 9.25 9.00 Negative Higher inflation, undervalued currency

EUR/CNY 7.62 7.98 7.65 7.84 7.86 7.91 8.13 Neutral All measures taken by BoC to stabilize the currency

EUR/JPY 123.48 123.72 124.50 126.00 127.00 126.00 126.00 Negative BOJ continues QE to weaken JPY

EUR/CHF 1.08 1.08 1.09 1.10 1.10 1.10 1.12 Positive Risk on mode will see the CHF weaken

EUR/MXN 20.34 21.94 21.26 21.84 21.56 21.84 22.25 Neutral High carry, Trump impact and election in 2018

EUR/BRL 3.72 4.04 3.63 3.72 3.79 3.74 3.91 Positive

Better growth and inflation outlook & benefiting from carry

trade - Political uncertainty


EURUSD: Consensus forecast vs actualConsensus forecasts do not usually match actual outcomes


-15% -12% -9% -6% -3% 0% 3% 6% 9% 12% 15%

0.94 -42 -33 -25 -17 -8 0 8 17 25 33 42 0.94

0.96 -37 -29 -22 -15 -7 0 7 15 22 29 37 0.96

0.98 -32 -26 -19 -13 -6 0 6 13 19 26 32 0.98

1.00 -27 -22 -16 -11 -5 0 5 11 16 22 27 1.00

1.02 -23 -18 -14 -9 -5 0 5 9 14 18 23 1.02

1.04 -19 -15 -11 -8 -4 0 4 8 11 15 19 1.04

1.06 -15 -12 -9 -6 -3 0 3 6 9 12 15 1.06

1.08 -11 -9 -7 -4 -2 0 2 4 7 9 11 1.08

1.10 -7 -6 -4 -3 -1 0 1 3 4 6 7 1.10

1.12 -3 -3 -2 -1 -1 0 1 1 2 3 3 1.12

1.14 0 0 0 0 0 0 0 0 0 0 0 1.14

1.16 3 3 2 1 1 0 -1 -1 -2 -3 -3 1.16

1.18 7 5 4 3 1 0 -1 -3 -4 -5 -7 1.18

1.20 10 8 6 4 2 0 -2 -4 -6 -8 -10 1.20

1.22 13 10 8 5 3 0 -3 -5 -8 -10 -13 1.22

1.24 16 13 9 6 3 0 -3 -6 -9 -13 -16 1.24

1.26 19 15 11 7 4 0 -4 -7 -11 -15 -19 1.26

1.28 21 17 13 9 4 0 -4 -9 -13 -17 -21 1.28

1.30 24 19 14 10 5 0 -5 -10 -14 -19 -24 1.30

1.32 27 21 16 11 5 0 -5 -11 -16 -21 -27 1.32

1.34 29 23 18 12 6 0 -6 -12 -18 -23 -29 1.34

EURUSD event risk map: 100% forward benchmark

Subjective view of financial impact event risks may have if 100 % hedged with forwards

EU

breaks

up

Grexit

Chinese/EM

Hard landing

Oil price

reboundsEU

Inflation pick

up

Trump

fiscal

stimulus

Fed

Tightening more

and faster

BS reductionGeo-politics

Iraq, Yemen

Ukraine

Less Fed

tightening EU

Relative Growth

continues

to pick up

EU

mishandle

BrexitItaly,

Spain


Group economic exposure analysis: example data only

Utilise FX rates & commodity prices to compare historic economic exposure levels &

support hedging strategy

Cash Flow at Risk development

& future plans


CFaR Project Background

How to quantify and manage our financial market risk

1

1.05

1.1

1.15

1.2

1.25

1.3

1.35

1.4

1.45

1.5

40

50

60

70

80

90

100

110

120

Oct 10 Oct 11 Oct 12 Oct 13 Oct 14 Oct 15Brent Crude Nov-15 (rhs) EUR/USD Spot (lhs)

➢ What is the best way to quantify our financial risk exposure – do we need to

hedge at all ?

➢ How are financial markets inter-related – does this provide an opportunity to

hedge less & save cost without increasing risk ?

➢ Can we create a dynamic model to propose & adjust optimal hedging

strategies ?

➢ What do other corporates do, what do banks & consultants recommend ?


Tetra Laval in summary

Macroeconomic scenarios – impacts for business

& financials

Dynamic hedging

Optimal hedge portfolio

CFaR for FX exposures

Economic exposure identification

Corporate benchmarking

CFaR for exposure forecast variation

CFaR for Commodity exposures

Financial risk management model

Cash Flow at Risk model development

We are working together with ING to build our own CFaR model


Cash Flow at Risk model – hedge optimisation

➢ Compute optimal hedging strategies based on risk tolerence and hedge

frame % cover

➢ Evaluate risk under forecasted FX curves and forward curves (hedge cost

minimization)

CFaR model computes thousands of hedging strategies’ risk, cost and forecast valuations

to help selecting a hedging strategy

Value at Risk

Hed

gin

g C

osts

Optimal 1

Optimal 2 Optimal 3 Optimal 4

Optimal 5

100% FWD

Our strategy

10 20 30 40 50 60

20

40

80

60

100

120

€ m


CFaR model proposes optimal strategies & includes

impact of volume variation (sample data)Our strategy includes options for risk of volume variation

Gross VaR 780


Comparing the strategiesTreasury strategy has lowest worst case outcome whilst allowing for volume variation

management and potential gain from positive event risks


➢ Monthly tracking of strategy performance

➢ Treasury’s P&L shows lower volatility vs other strategies

Risk reporting & hedging adjustments

-20,000,000

-15,000,000

-10,000,000

-5,000,000

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

25/09/2015 25/10/2015 25/11/2015 25/12/2015 25/01/2016 25/02/2016

Treasury performance CFaR optimal 1 CFaR optimal 2

CFaR optimal 3 CFaR optimal 4 85% fwd

Monthly tracking of strategy performance and adjustment to strategy based on

model outputs


CFaR model next steps

Further work required to complete CFaR model development

➢ Include commodity exposure as part of Group CFaR & assess

potential changes to hedging approach

➢ Include sensitivity analysis based on the impact of macro economic

events & how these events may impact our business

foreign exchange risk management & cash flow at risk · tetra laval international highly...

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