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The Volatile World of Exchange RatesManaging Foreign Currency Risk
The Volatile World of Exchange RatesManaging Foreign Currency Risk
Richard Masser FCIPSRichard Masser FCIPS
CIPS JourneyCIPS Journey
2009 CIPS Council
2010 FCIPS
2011 CIPS Board of Management
2012 CIPS Awarding Body and Foundation Boards of Trustees
2013 CIPS Global Board of Trustees Chairman
2015 CIPS President
2016 CIPS Appointments Committee
Merchants
Retail
Automotive
Manufacturing
Trading to Distribution
Total Supply Chain Solution
Career JourneyCareer Journey
WolseleyGroup
Ladbrokes
Autogem
Eurospace
Quantum
CrestwoodGroup
CrestwoodGPS
Environmental Factors Generate Risk In BusinessEnvironmental Factors Generate Risk In Business
Political
Economic
Social
Legal
TechnologicalTechnological
EnvironmentalEnvironmental
Political
Economic
Social
Legal
Technological
Environmental
Political
Social
Legal
TechnologicalTechnological
EnvironmentalEnvironmental
Political
Social
Legal
Technological
Environmental Economic
Foreign Currency RiskForeign Currency Risk
What does it mean?
How does it impact upon business?
Foreign Currency RiskForeign Currency Risk
Results when goods/services are
sold/bought in a foreign currency so creating a
foreign currency inflow/outflow respectively.
Results when companies convert
foreign subsidiary assets and liabilities from
foreign currency to domestic currency.
Foreign Currency RiskForeign Currency Risk
Transaction Risk
Translation Risk
What Do We Broadly Know About Foreign Currency Risk?What Do We Broadly Know About Foreign Currency Risk?
Nothing new
Exacerbated by global
events
Multiple drivers
Hard to predict without market
intelligence
More on the radar than
ever
Stakeholders more aware
What We Need To Consider in ProcurementWhat We Need To Consider in Procurement
How well do we know our suppliers and
their organisational
(fiscal) structure?
With which other countries do they trade
(buying or selling)?
Are they part of a group and
if so where is HQ and where
are the subsidiaries?
What is their domestic currency?
How are their company accounts
structured?
Are there any identifiable
currency trends?
In House ConsiderationsIn House Considerations
What currencies do we buy and sell in?
How have those currencies behaved over time?
Are there any obvious seasonal or recurring event trends?
Simple two way currency trade or are there cross currency transactions to consider?
Do we regularly monitor key currency behaviours over time?
Key In House Relationships for Procurement to BuildKey In House Relationships for Procurement to Build
Finance
Commercial
Sales
Cross Functional Interface Will Deliver Best Results Every Time
Mitigating StrategiesMitigating Strategies
Paradise Strategy
Buy in Sterling but remember you’re still exposed
Sunshine Strategy
Pass the cost down the supply chain
Equality of Misery
StrategyShare the pain with key stakeholders
Brick Wall Strategy
Other stakeholders realise the problem but refuse to help
Hedging Strategy
Work together with stakeholders to create an equilibrium
AssumptionsAssumptions
Product delivered from China on 70 days 'end to end' lead time
Consignment stock period of maximum 30 days
Customer payment terms of 90 days
Debtor (customer) gap 30 + 35 + 5 + 30 + 90 = 190 days
Creditor (supplier) gap 60 days
Net credit gap = 130 days
Strategy – Leave it to Chance (UK Based Company)Strategy – Leave it to Chance (UK Based Company)
Scenario 1 Flows Sterling Conversion
Euro Cost Base
Base Exchange Rate
Base day set up (plan) Sales Revenue 1,000,000.00 Product Cost of Sale 750,000.00 €975,000.00 1.30Gross Margin Cash 250,000.00
Gross Margin % 25.0%
Scenario 1 Flows Sterling Conversion
Euro Cost Base
Actual Exchange Rate
Payment to supplier due Sales Revenue 1,000,000.00 Product Cost of Sale 780,000.00 €975,000.00 1.25Gross Margin Cash 220,000.00
Gross Margin % 22.0%Delta Margin Cash -30,000.00
Strategy – Buy Forward (Fixed) (UK Based Company)Strategy – Buy Forward (Fixed) (UK Based Company)
Scenario 1 Flows Sterling Conversion
Euro Cost Base
Base Exchange Rate
Base day set up (plan) Sales Revenue 1,000,000.00 Product Cost of Sale 750,000.00 €975,000.00 1.30Gross Margin Cash 250,000.00
Gross Margin % 25.0%
Scenario 1 Flows Sterling Conversion
Euro Cost Base
Actual Exchange Rate
Payment to supplier due Sales Revenue 1,000,000.00 Product Cost of Sale 752,895.75 €975,000.00 1.295Gross Margin Cash 247,104.25
Gross Margin % 24.7%
Delta Margin Cash -2,895.75 -0.3%Cost of buying certainty
Currency bought forward at secured forward rate of 1.295
Strategy – Buy Forward (OPTION) (UK Based Company)Strategy – Buy Forward (OPTION) (UK Based Company)
Scenario 1 Flows Sterling Conversion
Euro Cost Base
Base Exchange Rate
Base day set up (plan) Sales Revenue 1,000,000.00 Product Cost of Sale 750,000.00 €975,000.00 1.30Gross Margin Cash 250,000.00
Gross Margin % 25.0%
Scenario 1 Flows Sterling Conversion
Euro Cost Base
Actual Exchange Rate
Payment to supplier due Sales Revenue 1,000,000.00 Product Cost of Sale 758,754.86 €975,000.00 1.285Gross Margin Cash 241,245.14
Gross Margin % 24.1%
Delta Margin Cash -8,754.86 -0.9%Cost of buying certainty
Currency bought forward at secured forward rate of 1.285
Exercise Option and Save – Outcome A
Strategy – Buy Forward (OPTION) (UK Based Company)Strategy – Buy Forward (OPTION) (UK Based Company)
Scenario 1 Flows Sterling Conversion
Euro Cost Base
Base Exchange Rate
Base day set up (plan) Sales Revenue 1,000,000.00 Product Cost of Sale 750,000.00 €975,000.00 1.30Gross Margin Cash 250,000.00
Gross Margin % 25.0%
Scenario 1 Flows Sterling Conversion
Euro Cost Base
Actual Exchange Rate
Payment to supplier due Sales Revenue 1,000,000.00 Product Cost of Sale 780,000.00 €975,000.00 1.25Gross Margin Cash 220,000
Gross Margin % 22.0%Delta Margin Cash -30,000 -3%
Actual exchange rate on day supplier invoice to be paid
Don’t Exercise Option – Outcome B
Strategy – Buy Forward (OPTION) (UK Based Company)Strategy – Buy Forward (OPTION) (UK Based Company)
Scenario 1 Flows Sterling Conversion
Euro Cost Base
Base Exchange Rate
Base day set up (plan) Sales Revenue 1,000,000.00 Product Cost of Sale 750,000.00 €975,000.00 1.30Gross Margin Cash 250,000.00
Gross Margin % 25.0%
Scenario 1 Flows Sterling Conversion
Euro Cost Base
Actual Exchange Rate
Payment to supplier due Sales Revenue 1,000,000.00 Product Cost of Sale 750,000.00 €975,000.00 1.30Gross Margin Cash 250,000
Gross Margin % 25.0%Delta Margin Cash - 0.0%
Actual exchange rate on day supplier invoice to be paid
Strategy – Trade in Common Currency (UK Based Company)Strategy – Trade in Common Currency (UK Based Company)
Scenario 1 Flows Sterling Conversion
Euro Revenue Stream
Base Exchange Rate
Base day Sales Revenue 1,000,000.00 €1,300,000.00 Product Cost of Sale 750,000.00 €975,000.00 1.30Gross Margin Cash 250,000.00 €325,000.00 Gross Margin % 25.0% 25.0%
Scenario 1 Flows Sterling Conversion
Euro Revenue Stream
Actual Exchange Rate
Payment to supplier due Sales Revenue 1,000,000.00 €1,300,000.00Product Cost of Sale 780,000.00 €975,000.00 1.25Gross Margin Cash 220,000.00 325,000.00Gross Margin % 22.0% 25.0%Delta Margin Cash -30,000
Scenario 1 Flows Sterling Conversion
Euro Revenue Stream
Actual Exchange Rate
Payment from customer due
Sales Revenue 1,040,000.00 €1,300,000.00 1.25Product Cost of Sale 780,000.00 €975,000.00 Gross Margin Cash 260,000.00 325,000.00Gross Margin % 25.0% 25.0%Delta Margin Cash 10,000
SCENARIO 1 - LEAVE TO CHANCE - POSITIVE OUTCOME
Strategy – Trade in Common Currency (UK Based Company)Strategy – Trade in Common Currency (UK Based Company)
Scenario 2 Flows Sterling Conversion
Euro Revenue Stream
Base Exchange Rate
Base day Sales Revenue 1,000,000.00 €1,300,000.00 Product Cost of Sale 750,000.00 €975,000.00 1.30Gross Margin Cash 250,000.00 €325,000.00 Gross Margin % 25.0% 25.0%
Scenario 2 Flows Sterling Conversion
Euro Revenue Stream
Actual Exchange Rate
Payment to supplier due Sales Revenue 1,000,000.00 €1,300,000.00Product Cost of Sale 780,000.00 €975,000.00 1.25Gross Margin Cash 220,000.00 325,000.00Gross Margin % 22.0% 25.0%Delta Margin Cash -30,000
Scenario 2 Flows Sterling Conversion
Euro Revenue Stream
Actual Exchange Rate
Payment from customer due
Sales Revenue 984,848.48 €1,300,000.00 1.32Product Cost of Sale 780,000.00 €975,000.00 Gross Margin Cash 204,848.48 325,000.00Gross Margin % 20.8% 25.0%Delta Margin Cash -45,151.52
SCENARIO 2 - LEAVE TO CHANCE - NEGATIVE OUTCOME
Strategy – Trade in Common Currency (UK Based Company)Strategy – Trade in Common Currency (UK Based Company)
Scenario 3 Flows Sterling Conversion
Euro Revenue Stream
Base Exchange Rate
Base day Sales Revenue 1,000,000.00 €1,300,000.00 Product Cost of Sale 750,000.00 €975,000.00 1.30Gross Margin Cash 250,000.00 €325,000.00 Gross Margin % 25.0% 25.0%
Scenario 3 Flows Sterling Conversion
Euro Revenue Stream
Actual Exchange Rate
Payment to supplier due
Sales Revenue 1,000,000.00 €1,300,000.00Product Cost of Sale 750,000.00 €975,000.00 1.30Gross Margin Cash 250,000.00 325,000.00Gross Margin % 25.0% 25.0%Delta Margin Cash 0
Scenario 3 Flows Sterling Conversion
Euro Revenue Stream
Actual Exchange Rate
Payment from customer due
Sales Revenue 1,000,000.00 €1,300,000.00 1.30Product Cost of Sale 750,000.00 €975,000.00 Gross Margin Cash 250,000.00 325,000.00Gross Margin % 25.0% 25.0%Delta Margin Cash -
SCENARIO 3 - HEDGE COST AND REVENUE FLOWS - NEUTRAL OUTCOME
Currency soldforward at secured
rate of 1.30
Currency boughtforward at secured
rate of 1.30
AKA
Cur
renc
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AP
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It's Only Mind Blowing If You Don't Plan Your Strategy!