Understanding Foreign Currency Exchange and Reducing Risk

and we welcome everybody to the webinar

which is titled understanding foreign

currency and reducing risk today's

webinar is sponsored by scar you

Scarborough university was founded in

2006 with a mission to provide necessary

relevant and continuing education the

Scarborough employees clients and

professionals engaged international and

domestic trade and logistics my name is

Kevin extra and I am a licensed customs

broker and certified custom specialist

and I have the privilege of being the

vice president of sales and marketing

for Scarborough international it's an

honor to be with you today this is an

interactive webinar we are here to

answer your questions so please the

mixed questions you will find a button

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will appear for the audience to see you

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maximize or minimize districts of the

webinars so while you are adjusting your

screens and posting your questions I'll

take a minute to introduce you to

Scarborough Scarborough is a

full-service logistics company that has

been operating for over 31 years we are

headquartered in part of America Kansas

City where Faith Family and hard work

make for a great organization we also

have officers in Chicago st. Louis Des

Moines New York Dallas Laredo Texas

Nuevo Laredo Mexico and Shanghai China

beyond our offices we are part of an

ancient network of companies that puts

us in every single country around the

world where we can take more of your

needs we are truly a great partner to

our clients we collaborate stand by

their side and actively participate in

the growth opportunities by helping them

navigate import and export regulation

around the word

we value each and every partnership

along with each and every relationship

we build along the way as always I would

like to thank each of you for being here

today to our many clients on the call

today thank you for your partnership if

you are not yet a Scarborough client we

walk coming off the committee to earn

your trust and partnerships Scarborough

also values our numerous partnerships

with government the media industry

associations universities colleges

nonprofits and for-profits businesses

being a leader in international trade

requires the strong relationships and

today we get to feature another one of

our partners can but not burns whoa

before but not burn global for all

troubles a boutique capital markets

trading firm specializing in currency

advisory and payment services our firm

is day and they describes himself as our

firm is purely client-oriented and our

basic model is to combine expert counsel

in pre-trade analytics with low-cost

execution and they do a great job at

that I've been working with them for a

couple years now their mission is to be

the most trusted for an exchange partner

in the market today and with that I

would like to introduce you to our

presenter from Bernard burned today mr.

Robert Bradley Bob Bradley and he is a

partner with banana but I've heard

bannockburn um he is a fool in charge of

foreign exchange trading and research

mr. Bradley graduated from st.

Bonaventure University in 1980 with a

degree in business administration and

with a focus on economics and finance

his first job after graduating was at

barclays bank international on Wall

Street like a tank office of foreign

exchange and money markets trading area

this position was his first and what

would become a nearly 30-year career in

foreign exchange mr. Bradley then moved

suit to lung SE bankin also in mmmm

where he was initially involved in

managing the foreign exchange bank or

back office before moving on to it with

an unfurnished

saving desk mr. Bradley held various

roles over his 11 years a testing

beginning with position position clerk

junior spot traitor for Forex at money

markets Chiefs popular for foreign

exchange we finally a role in global red

blood cells in 1996 mr. Bradley moved to

Cincinnati Ohio to become a director of

foreign exchange with 53 Bank Corp where

things initially involved in sales and

marketing before moving into management

role in trouble and risk management bob

has been with Bennett burn from its

inception in 2009 works in the FF

foreign exchange trading and research

area and he currently resides in

Cincinnati Ohio with his wife Cindy and

there's two children and so we're very

thankful to have Bob as I here today and

I would like to go ahead and turn it

over to Bob and to just uproot our

presentation today hi everybody can you

hear me we can that great thanks Devon

for the introduction and we've got a

number of slides we can walk through and

just in preparation for that I just like

to give you a few words of introduction

along with what Kevin was saying we are

client focused here at Bannockburn and

our sole product is foreign exchange so

we are actively working with clients to

understand their foreign exchange in

needs and then directing and advising

them in terms of the products that they

can use to manage a foreign exchange

risk that they have so with that will

kind of walk through the slides and

we'll keep the questions going i think

you know we've got quite a bit of time

at the end to direct answers to any

questions that you have that's like

canada ok

this is the beginning here foreign

exchange I believe is the largest

trading market you know seven trillion

number is on the screen there obviously

some days are going to be higher than

others but the message here is that with

the world wait is now where no payments

and funds move quickly goods and

services move quickly as well the

movement of currencies is substantial

and growing so you'll often hear the

world is becoming a smaller place and

places that were not really involved in

foreign exchange or global finance

sudden we are and will go to a number of

examples of how different types of

companies utilize the foreign exchange

market that's like yep now here I

thought to run through a couple of

examples you'll see a lot of different

types of companies that are involved in

utilizing foreign exchange and then what

I ought to do is talk about one of my

clients here in northern Ohio area is a

importer of product from Germany which

they in turn sell here domestically in

the US now it's a typical situation that

we're involved with where the company

has u.s. dollar receivable but a foreign

currency payable and the current we're

talking about here is euro and for them

it's a substantial amount of their

product sales they are buying them from

Germany and they are looking to protect

that foreign exchange risk basically the

dollar exchange rate versus the euro the

way they manage this risk is they enter

into a number of we'll talk about this

more forward contracts where they will

help luton amount of invoices to pay

in the euro and they'll look for

opportunities where the rate is

favorable and then lock into a forward

contract out one month out as long as

one year in order to lock in the finance

be the dollar cost of that that euro

payable that they'll have and they use

throughout the year it's an ongoing

hedge for them I just visited them

recently that we talked about the

likelihood of the Euro going lower which

would be to their advantage and likewise

the risk of the Euro going higher which

would be to their disadvantage so

oftentimes there's there's no gold and

answer in terms of how best to manage

foreign exchange risk but this company

is very comfortable in looking for

opportunities to buy Euros at a low rate

to lock in their need and they have you

know a period of time in order to do so

now the second example there is an

exporter who receives foreign currency

so unlike the foreign currency payable

for the first one this is the foreign

currency receivable I've got another

client here closer to the Cincinnati

area that falls into this category it is

a software type company and they sell

product overseas in both Europe and Asia

as well and they look to then manage

this cup foreign currency receivable and

lock in the dollars as soon as they know

that they're going to be receiving the

foreign currency so thus they know what

foreign amount is going to translate to

in u.s. dollars so again we've seen

instances where this company will hedge

forward a receivable that they know is

coming in one month or two months or

three months they can lock into that

foreign exchange rate now and the snow

the US dollar receivable that they're

going to get so again this is a

our company you know here Ohio

protecting their foreign currency

receivable now there's a number of other

instances there i'm not going to run

through them all but what I talk about

is you know even companies here in the

US that typically knew themselves as

doing dollars only and I did a seminar

here in Cincinnati a few weeks ago and

most of the companies Cincinnati related

were selling product into Europe and

they were doing so as US dollars now the

issue that they had is that the

customers in Europe were complaining as

the US dollar was strengthening so here

is an example where their customers are

selling product in Europe in Euros as an

example and their customers then have

this payable in u.s. dollars as the

weakened the receivable wasn't

worth as much in US dollar terms and

their customers were complaining about

the high cost of buying the product from

this us supplier so this again is US

company thinking that they've eliminated

foreign exchange risk by dealing and US

dollars only but finding them involved

in currency matters because their

clients are involved in currency

transactions and we heat this a lot

especially you know in this situation as

the world grows smaller there is often

competitors in local currencies and

suddenly the US dollar becomes expensive

overseas companies to buy so again

dollar companies involved in currencies

even if they don't intend to be that's


now when people think about how to

manage foreign exchange risk it often

becomes a question of well what's going

to happen with these currency rates and

what I talked about here is if anybody

knew for certain if a currency was going

to strengthen or weaken burst another

currency we'd be on the beach somewhere

drinking exotic drinks because they're

it for certainty in terms of foreign

exchange and what I'll often talk about

as well is it seems to be more of an art

rather than a science in terms of

predicting foreign exchange movements

now on this slide you see a number of

different factors that can contribute to

movement in terms of foreign exchange

rates and what's happening with a lot of

these is they are playing amongst

themselves so you know one could you

know influence the foreign exchange rate

one way and another factor could

influence in a different way so it's

hard to gauge what's the most important

factor words what might not be an

important factor and one of the areas

that I think is difficult to understand

is markets expectation of where for

change rates are going verse reality of

where they actually do go and this

becomes impactful because the position

of the marketplace often dictates where

the next foreign exchange movement is

and I'll liken it to a situation where

if everybody believes that the US dollar

is going to strengthen most companies

globally have taken positions and

utilized the different products

available to hedge what they expect to

be a stronger US dollar now oftentimes

this creates a very difficult situation

should the opposite occur so if P

or positioned for stronger US dollar and

suddenly the opposite happens then you

can get Iraq their extreme movement and

a lot of times we talked about extreme

movements in percentage type terms and

often it's the most valuable usage to

think about because often what companies

are really trying to do in terms of

foreign exchange is protect their margin

so companies build their their product

and their evaluation and their financial

statements on a specific although moving

you know model some companies and might

have a percent natural margin in their

business some companies might have a

hundred percent margin some much less

now oftentimes if it is a you know a

number say as an example of twenty

percent margin and suddenly we see a ten

percent movement in terms of foreign

exchange that might be you know adverse

to them suddenly your margin goes from

twenty percent which you expected and

now you've lost ten percent of that

margin in terms of a foreign exchange

movement so companies are you know

trying to protect that marketing at its

core and thus this foreign exchange you

know management becomes impactful now

some of those other you know bullet

points on the screen there I'll just

highlight a couple of them you know the

interest rate differential between

countries impacts currency markets

especially in today's environment where

the expectation of the interest rate

differential in favor of US dollars is

expected to wipe the Federal Reserve is

viewed as in an interest rate rising

type of scenario albeit very slowly

we're at this time you've got several

other countries that are scoring lower

interest rates and

expand economic growth so this

differential is expected to widen and is

one of the reasons why the US dollar in

general terms has been appreciating

first a number of different currencies I

think the next slide Kevin okay here is

an example it's a bit dated but here

you'll see the movement of confluence

evertz another and this is based on you

know a central bank policy decision and

it's going back to 2014 so again a bit

dated but an example of how the exchange

rate is trading for the euro around 130

125 and after an unexpected move by the

European Central Bank suddenly we find

the value of the euro about 1.4 percent

lower so an example of a quick

adjustment in terms of the market and

it's something where might be

exaggerated because of the unexpected

nature of the europe central bank

movement next like Kevin this is another

example some of the numbers are a little

bit hard to see on the slide but it's

dalton this time and we're looking at

again 2011 where suddenly the exchange

rate for the dollar moved down four

point six five percent and then up

roughly eight percent and then down six

point three percent in a relatively

short period of time so again it's a

situation where you know markets have an

ability to move and move rather quickly

now the next slide puts this into

context here you look back at the

circled area which is what we were just

looking at it a prior slide so when you

see that movement you know a longer-term

five-year graph

the the movement doesn't look that

spectacular especially when you're

you're looking at an overall movement on

from about 80 in the dollar-yen all the

way up to 100 1997 so this is a you know

a dramatic longer-term increase in the

value of the dollar now just to speak

quickly about the yen versus the dollar

this move in this five-year period is

reflective of an aggressive movement by

the central bank in Japan and the

government in Japan to raise economic

growth and raise inflation now as some

of you may know japan has been fighting

a deflationary environment for decades

and a deflation environment is one in

which inflation doesn't rise it you know

moves lower and it's very difficult in

terms of economic growth in a scenario

where you could buy something today but

with deflation it would be less

expensive tomorrow so this is very

detrimental to economic growth and is

something the prime minister of a upon

gaining control of the government very

much try to put a policy in place or i

should say policy in place to bring

about stronger economic growth and to

defeat inflation and to achieve their

two percent inflation target now along

with that that little rapid you know

weakening of the Japanese yen across the

currency spectrum not just against the

US dollar but a drastic movement in

terms of currency valuation next slide

Kevin this one is again a little bit

dated 2013 2014 and it's the Russian

rubel and here you've got a political

situation with Ukraine and Crimea and

along with that you've got a you know

lowering of the price of oil and several

other factors that have led to a rather

dramatic weakening in terms of the

Russian ruble and heat you know if we're

talking about multiple four sets so

again the focus comes back to companies

with an exposure in the Russian ruble

needing to look to some type of

protection in order to manage their

margin that's like Kevin now this this

slide talks about the current debate

about what's most important in terms of

directing you know the currency markets

and in the environment we find ourselves

currently often with central bank is

view as the primary driver of currency

value not the sole driver but perhaps

the primary driver and what I would talk

about here is this idea that the central

banks have begun and continue to manage

trying to grow the economies and then

boost inflation so situations where

we've got negative interest rates in a

number of different countries and

extremely low interest rates in just

about all global countries leads us

through this idea that central banks are

playing a primary role now as I

mentioned before the Fed is viewed as

moving interest rates higher as the US

economy seems to be improving albeit

very slowly likewise at the same time

you've got a number of other central


japan particularly Switzerland another

one and the European Central Bank all

driving interest rates to you know

all-time lows now this situation that we

find ourselves in is by no means a

normal situation anytime somebody is

talking about negative interest rates is

unusual to say the weeks now recently we

seem to get into this situation where

perhaps the level of interest rates has

begun to stabilize basically I'm hinting

that you know the central banks might

not be lowering interest rates any

longer and we could see not only in the

US but in other countries as well

perhaps a a gradual extremely gradual

move to a higher interest rate

environment but at the same time you

know we might be a long ways to

recovering any type of abnormal type of

situation now as Kevin I've been in this

business for a long time and a

normal-type interest rate you know in my

view for the u.s. is somewhere between

three percent and six percent for the

Fed Funds currently where we're at 50

basis points so half a percent so that's

there's nothing normal about that

however now coming out of the severe

economic crisis 2008 2009 perhaps this

extremely low interest rate environment

will be here to stay as we work through

the ramifications long-term

ramifications of the economic

environment from OE and O'Malley the

last will mention here on this slide is

the brexit that's a situation where on

jun 23 the UK decided to via referendum

move away from the EU and that's a

significant occurrence and

no they were still seeing ramifications

of that now but it quickly led to about

fourteen percent decline and the value

of the British count next up Kevin so

here we've got more of a you know a

current type of situation you know euro

trend Canadian you know crude and the

Mexican peso now when you look at this

graph it looks like the euro it's kind

of caught between 110 + 115 currently

and the Canadian dollar right around 130

give or take you know we get to 133 and

then we move down to 128 but dollar

versus the Mexican looks like it's on an

uptrend part of that is due to the you

know weakening of the oil price that we

had seen and then kind of the sideways

trade in terms of oil next slide kill

them so here you know we talked about a

number of situations where the movement

of foreign exchange rates can be

dramatic and then the question becomes

you know what can they do to protect my

margin and these types of unusual

financial conditions globally next line

Kevin so hedging it is a way that we

talked about as I mentioned at the start

you know the company in northern Ohio

they have a foreign currency payable in

URL and they manage it by doing forward

contracts now forward contracts can be

customized to whatever amount whatever

period that one need and I also like to

say that it's not catching it into stone

so if you do a forward contract today

for a 61 forward settlement and suddenly

you know tomorrow you found out that

you're going to need them earlier maybe

three months down the road you can

adjust your forward contract according

so again it's not itching it into stone

and it's giving you a flexible way to

manage your foreign exchange risk today

so that you know what your payable cost

is going to be in dollar terms or

conversely what your receivable in

foreign currency terms will be worth in

US dollars