MOVING BUSINESS FORWARD June 2014 business.westernunion.ca
WESTERN UNION 17% market share of cross-border money transfers 485,000+ Agent locations worldwide Valued at approximately $8.6 Billion on the NYSE # 445 on the Fortune 500 2013 list
WESTERN UNION BUSINESS SOLUTIONS Communication Process Product Systems Payments People CURRENCY EXCHANGE RISK MANAGEMENT PAYMENT SOLUTIONS
Electronic Payments Solutions Access to Western Union’s global banking network Foreign currency payables and receivables in over 200 countries No intermediaries Increased speed Reduced cost
Western Union Business Solutions FX Risk Management Process Mel Francis June 4th 2014
Agenda Western Union Business Solutions Corporate risk Management The Canadian Dollar The FX Risk Management Process Planning Execution Evaluation Examples of Hedging Strategies Conclusion © 2014 Western Union Holdings, Inc. All Rights Reserved. Western Union Confidential
Corporate Risk Management Controllable Risks Foreign Exchange Interest Rate Credit Commodities Non-Controllable Risks Competition Economic Situation Political Situation Goal: Transfer and minimize the controllable risks in order to decrease the negative impact on the profit margin. © 2014 Western Union Holdings, Inc. All Rights Reserved. Western Union Confidential
Currencies – South America Legal Restrictions Financial Restrictions (Taxation) Liquidity Restrictions © 2014 Western Union Holdings, Inc. All Rights Reserved. Western Union Confidential
Canadian dollar– Historical 1 Year Graph Thomson Reuters - June 2nd 2014 © 2014 Western Union Holdings, Inc. All Rights Reserved. Western Union Confidential
Where will the Canadian Dollar be one year from now? © 2014 Western Union Holdings, Inc. All Rights Reserved. Western Union Confidential
Canadian Dollar - Economists Forecast Bank Name 1 month 3 month 6 month 1 year BMO 1.1050 1.1150 1.1250 1.1500 RBC 1.1000 1.1300 1.1600 CIBC ** 1.1200 1.0900 1.0800 TD 1.1700 Scotia 1.1100 National 1.0950 1 month 3 month 6 month 1 year Minimum 1.0800 1.0600 1.0400 1.0000 Maximum 1.1300 1.1700 1.2000 1.2200 # Forecasts 48 53 51 * Thomson Reuters - May 7th 2014 © 2014 Western Union Holdings, Inc. All Rights Reserved. Western Union Confidential
The New Reality of the FX market The volatility of the Canadian dollar is increasing. The competitiveness of the Canadian Companies is increasing. Companies are looking to protect their exposures with a possibility of participating in favorable market movements. © 2014 Western Union Holdings, Inc. All Rights Reserved. Western Union Confidential
FX Risk Management Process *Forecast the FX exposure. * Calculate the budget rate. * Put a hedging strategy in place. *Start executing the hedging strategy. * Put orders in the market covering the long term needs *Evaluate the efficiency of the hedging strategy. EVALUATION (end of your fiscal year) PLANNING (beginning of your fiscal year) EXECUTION (during the year) © 2014 Western Union Holdings, Inc. All Rights Reserved. Western Union Confidential
Forecast the FX Exposure. Determine a budget rate. Planning Forecast the FX Exposure. Determine a budget rate. Perform a Sensitivity analysis. Perform a Client Evaluation. Develop a hedging strategy in place. © 2014 Western Union Holdings, Inc. All Rights Reserved. Western Union Confidential
FX Hedging Strategy % of Coverage Term Products Spot Forwards Structured Products © 2014 Western Union Holdings, Inc. All Rights Reserved. Western Union Confidential
FX Risk management Strategy Client Evaluation About the company Who are your biggest clients? Who are you biggest competitors? What is the main challenge your business is facing? What is your actual total Sales for 2013? What is your forecasted total Sales for 2014? What is your profit margin? FX Exposure and impact What was your total FX exposure for 2013? What is your forecasted total FX exposure for 2014? When is the end of your financial year? When do you start your budgeting for next year? Pricing Strategy How do you set your prices? Can you pass a negative FX move to your clients? What are your payment terms with your clients? What are your payment terms with your suppliers? Budget Rate What is your budget rate? How do you set your budget rate? What is your desired rate? FX Risk management Strategy What is your FX hedging strategy? How do you evaluate your FX risk management performance? Have you ever used Forwards? Have you ever used Options? © 2014 Western Union Holdings, Inc. All Rights Reserved. Western Union Confidential
Objectives of a Hedging Strategy Protect the profit margin of the company. Eliminate the majority of the controllable risks. Respect the expectations of the shareholders or the partners. © 2014 Western Union Holdings, Inc. All Rights Reserved. Western Union Confidential
Example for a seller of USD The Canadian company is a seller of USD (exports to Chile but prices/invoices in USD) Profit is 1M Client has an exposure of 5M USD Budget rate: 1.07 Client can change his price list every 6 months © 2014 Western Union Holdings, Inc. All Rights Reserved. Western Union Confidential
Sensitivity Analysis Spot Rate Profit/Loss* 1.13 $300,000 1.10 $150,000 1.07 – Budget rate 1.04 $(150,000) 1.01 $(300,000) * Based on 5M USD FX exposure (USDCAD seller) © 2014 Western Union Holdings, Inc. All Rights Reserved. Western Union Confidential
Strategy The proposed strategy is to protect a worst case scenario of 1.0900 (2% better than the budget rate) with a possibility of additional participation in favorable market movements, for a period matching his price list. Term : 6 months % coverage: 80% Products: structured products protection at 1.09 (locking an additional 2% of profit) with a participation in favorable market movements up to 1.1350. © 2014 Western Union Holdings, Inc. All Rights Reserved. Western Union Confidential
Conclusion Don’t underestimate your FX risk exposure. Have an FX Hedging strategy in place. Don’t hesitate to contact your FX trader. © 2014 Western Union Holdings, Inc. All Rights Reserved. Western Union Confidential
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