Indiana Logistics Summit

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation ConferenceSupply Chain
Management Practices for Currency
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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• Dealing in foreign currencies offers
  rewards and risks
• Treasury risk management has to be seen within
  an integrated risk framework
• Reference
• CFO Architect of the Corporations Future,
  John Wiley Sons, 1997

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• Business risk is a matter of perspective.
• Finance, operational managers, institutional
  investors, all see risk differently.

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• Business risk arises from the likelihood that
  something good wont happen, as well as the
  threat that something bad will happen.

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• The population of risks can be divided into 5
  (five) main groups
• Strategic Risks of plans fail
• Financial
• Operational Risks of human errors or
  omission
• Commercial Risks of business
  interruption
• Technical Risks of physical assets
  failure

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference
Financial Risk

• Risks of financial controls fail
• Treasury risks
• Lack of counterparty / credit assessment
• Sophisticated fraud
• Systems failure
• Poor inventory/receivables reconciliation

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• All types of risk affect the strategic
  direction and ultimately the companys
  ability to generate shareholder value.
• In the past risk might have been the
  insurance managers responsibility.
• Financial control mattes are the treasurers
  responsibility.
• Consumer relations might have been the sales and
  marketing responsibility.

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• Today functionally segregating risk management
  is out-dated!
• An integrated view of business risks and risk
  management is required.

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• What is the reason for such a change?
• More and more people study business performance
• Banks, investors, consumers demand more evidence
  how the company plans to maintain a strong
  balance sheet.

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• Competitive pressures escalate
• Economic use of limited resources requires the
  company to lower its exposure of risks, which
  it is not in the business to take.

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• Risk management can create new advantages
• The investment community may favor a stock, if
  it understands the rationale underlying the
  total risk management effort.

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• Individual loss or gain can match business loss
  or gain.
• Senior executives with successful risk taking
  enjoy better career prospects.

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• Corporate fortune can reverse overnight.
• News hits the stock market, a companys
  position can flip- flop instantaneously.

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• Global regulations grow more complex
• Corporations have the obligation to disclose to
  shareholders which risks they are in business
  to take, and what they are doing to manage them.

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• Risk management means dealing with uncertainty.
• What can go wrong, or fail to go right?
• How often?
• What counter-measures exist, or could be
  installed?
• How likely are they to be effective?
• What about risks we dont know?
• Awareness of what risks might arise, where and
  crucially, how material they are to the company.

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• Focus on materiality, not source
• Risk management requires an integrated approach
• Elimination of risks, eliminates opportunity for
  profits
• Greater risks bring greater returns

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• Corporate management decides on risk appetite.
• Is the risk consistent with the companys
  current philosophy?
• With its history of gains and losses?
• With investors understanding of how much is at
  risk?
• With managements skills and experience?
• With the businesss cash flow, debt position,
  balance sheet strength and so on?

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• Foreign currency risk as part of risk management
• Foreign currency-a currency other than the
  functional currency of the business.
• Foreign currency transactions require settlement
  in a currency other than the functional
  currency.
• An exchange gain or loss occurs when the
  exchange rate changes between the purchase date
  and the sale date.

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• How can you avoid/manage foreign exchange
  gains/losses?
• Foreign exchange exposure occurs through
• Economic exposure
• Transaction exposure
• Translation exposure

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• Foreign exchange gain and loss can be managed.
• Through avoidance
• customers may not like it
• Leading and Lagging
• Netting
• Bilateral
• Multilateral

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• Re-invoicing
• using a central office, which takes over foreign
  exchange exposure.
• Hedging
• By forward contracts
• By purchase of futures
• By purchase of options
• By engaging swap contracts

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• Examples of foreign currency management
• By compensating business arrangements
• BMW buys parts in the US for Europe
• BMW manufactures cars in the US
• Siemens management of exports and imports

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• By hedging
• Mercedes Benz
• Porsche
• VW

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Indiana Logistics Summit 52nd Dr. LL Waters
Transportation Conference

• Strategic approach to currency management
• Centralize foreign exchange/ finance
  activities around the world to better realize
  exposures and fully integrate treasury
  operations with underlying business process
  systems.

Thank you for your attention.