Current Trends in Foreign Exchange Randy Royther Head of Commercial Products 5/23/2016

FX Basics 2 Non-dollar payments/collections from/to US accounts require FX transactions. The foreign exchange market conducts the largest monetary value of transactions of any capital markets instrument class. A non-dollar payment is generally achieved by selling an amount of USD to purchase a given amount of foreign currency at an exchange rate. Non-dollar collections to US based accounts are executed by selling the foreign currency and using the proceeds to purchase USD at an exchange rate. The movement of funds to and from the US is conducted through the SWIFT system.

3 Major Currency Pairs

Latin America Pairs 4

Settlement / Transaction Types 5 Spot –Shortest settlement available. Generally two good business days in both countries. Used for all immediate payments and collections. Forward –Settles at some point in the future. Future dates must be a good business day in both countries. Generally used as a hedging instrument. Cash does not move until the forward date. Window Froward –Same as a forward but the transaction may take place on any date between a pre-specified window of time. Swaps –Similar to a forward but generally converts a series of cash flows for a longer term. Useful when issuing debt or entering into a loan in one currency and the converting those cash flows to another currency. Options –A contract that grants the holder the right, but not the obligation, to buy or sell currency at a specified exchange rate during a specified period of time. For this right, a premium is paid to the broker. These instruments are used to hedge cash flows that may not be certain or to protect against large rate fluctuations.

Hedge Accounting 6 3 types of hedges –Cash flow – used for cash transactions that can affect net income –Fair value – used to hedge value of assets or liabilities on the balance sheet –Net investment in foreign operations – non US sub or stand alone operations Accounting entries are made which offset any change in the value of the FX transaction. Must declare the transaction to be a hedge when entering into the trade. Must perform initial hedge effectiveness testing and ongoing testing. –Counterparty should be able to assist you with this or hire a 3 rd party. Make sure your audit/accounting firm understands hedge accounting and your strategy. Wikipedia has great examples –

Value at Risk and Collateral 7 Forward hedging agreements create exposure for the counterparty because no cash is exchanged until settlement date. Value at Risk or VaR is a calculation of the possible decrease in value of a FX transaction on any given day. The one day VaR must be expanded for longer term transactions. Forward hedging transactions are usually collateralized by: lines of credit, cash deposits or securities. Collateral is never used by the counterparty unless there is a default under the terms or the counterparty agreement.

VaR Calculation 8 ClientCurrencyNotionalMaturitySDSRSD1 Day VaRLife VaR CAD (125,000.00)7/12/ , CAD (29,000.00)8/11/ , (154,000.00) 1,223 12,288.51Total VaR

Execution Methods and Platforms Most transactions involve an FX trade and an international non- dollar wire. Many counterparties and 3 rd party vendors will accept phone or electronic submission of instructions but the growing trend is toward internet based FX platforms. Banks can select vendors that will provide a white label solution or you may elect to have your vendor face your customers directly. –Banks should carefully review vendor capabilities and work flow as they vary widely. Be mindful of your ability to control administrative functions and report generation. The ability to customize pricing by notional amount term and currency is important. –Vendor generally price based on a flat fee or revenue sharing. End users should consider pricing in addition to ease of execution when selecting a vendor. –Some useful execution tools include: order allocation, speed of setting up repetitive or free form instructions, response time for execution and confirmation receipt and tickler notices for approaching forwards. 9

Historic Trade Weighted Dollar 10

Historic Returns vs. USD 11

Volatility vs Return 12

Historic Swiss Franc 13