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Managing Foreign Exchange Risk Webinar

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Managing Foreign Exchange Risk WebinarGlobal political and economic uncertainty makes understanding the best practices surrounding currency exposure management even more critical than ever. During this webinar, renowned global currency expert Wolfgang Koester, CEO of FiREapps speaks to best practices for CFOs and Treasurers managing currency risk related to the Eurozone crisis, China, and emerging markets. He also addresses current trends and the unintended consequences of the Dodd-Frank Act. Webinar content also includes an interactive discussion on currency exposure management featuring Treasury leaders from Accenture and FLIR Systems, Inc. who share their insights and first-hand experiences with FX management.

This Managing Foreign Exchange Risk Webinar video is from the Proformative webinar "Discover Best Practices for Managing FX Exposures" held on July 18, 2012.  The webinar features presentations from Andrew Gage, VP, FiREapps, Wolfgang Koester, CEO, FiREapps, Brian Kowles, Assistant Treasurer, Accenture, and Randahl Finnessy, VP, FLIR Systems.

 

Managing Foreign Exchange Risk Webinar

 

"Let me start off by just making probably a bit of a bold statement, but probably not counter-intuitive, which is volatility since 2008 has significantly increased and is here to stay for the unforeseen future. The volatility comes in two areas. One, sudden movements of currencies that can impact and will impact financial results, and secondly the decoupling of the dollar versus many currencies.

When I look at this thing from a just pure volatility point of view, I'm sure a lot of the people that are listening today will already have seen significant strike in volatility just in the first couple of weeks of July. Which, if they weren't prepared and look to be prepared more, we'll talk some more about that. It's important to be very quick in this new environment in order to be able to act to mitigate risk because time has become a worse enemy than ever.

With that, let me go on to the next slide there. Really, one of the areas that really makes it even harder for treasuries to accommodate the increased volatility is the addition then to corporations looking for double-digit growth, if possible, in more frontier countries. The vast majority, as you can kind of see it here, is of Fortune 100 companies. 86% are looking to increase internationally, while only 14% are not. I'm sure pretty much everybody on the phone will be able to attest to that.

On the international Fortune 100 companies, 94% of them manage that risk already in some level or form. People are addressing it. They understand it. They understand that this is an issue, but this is an increasing difficult issue because of A) the market environment and B) what already corporations are doing to expand.

On the next slide then, I think I want to get into the topic pretty quickly one before that on the slide of - with respect to the Euro, I think I've probably been pretty known to be outspoken about this already. Starting about 18 months ago, I felt that the foundation for the Euro is crumbling. I still believe that Germany and France can likely afford a Greece, Ireland, and a Portugal, but when it comes to Spain and Italy, really Germany is not able to A) finance (inaudible 00:02:36) those countries and B) probably not willing to.

Because the ability to keep their economy very competitive due to a lower Euro versus a higher Deutsche Mark has the offsetting effect that they have to have cost associated with it, the cost of financing some of the (inaudible 00:02:57) would have been and has been positive for Germany. Now with Italy and Spain that is definitely tipping the other way.

There really are only two alternatives to come out of the Euro crisis in my opinion. One is to significantly devalue the Euro, and I think we've already seen some of that happening. That may save it. I still think that that will not be enough to actually end up saving the Euro. Brian will talk about in a second the middle of 2013.

Now, this isn't only impactual to chief financial officers who are trying to really understand the analytics around what is our Euro impact and what could this mean. I have lots of discussions with boards and CEOs about their concern. As you can see here, a numerous amount have already gone public with this, but believe me, I'm having even more discussions.with CEOs about their concerns of really making their numbers and what this impact will mean.

We then go on to the next slide. It really depicts the volatility nicely about what is going on. What we tried to do in this slide here, not the one before, is really to look at the activities of what is going on with the Euro dollar. You can see some significant referencing there of activity happening over the last ten to 12 months, versus prior to that kind of on the 2010 framework to roughly the October 2011 framework.

Every single time you see a score like that, you see sudden moves in the currencies and consequence, volatility increase. I think that what is very interesting here for everyone new to watch this, what are the dates? I get a lot of questions, well what do we really mean and when could one expect some significant news in this?

At the end of the day, this whole thing - and that's why I'm looking at the middle of 2013 - moves towards their German federal election in September of 2013, where at this point it looks like Merkel's job is significantly at risk. She's got to figure out one way to address the Euro issue certainly going into the election.

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We see continuous volatility in the Euro with respect to other currencies going certainly well into the end of this year, as well as into the beginning and middle of next year. By that time, we'll have a pretty clear indication of where this is going. I still think that there's high [inaudible 00:05:45] that they're going to get some significant movement in
there that could significantly alter the existence of the Euro.

One of the things that is important here to realize, though, as I'm talking to a lot of boards, CEOs and CFOs is not only are they concerned about the Euro, and that certainly isn't a forefront, but also are they looking at China, for example. You've got to look at a few things that are happening there. You're seeing a continuous, somewhat still stringent, but broadening of the bandwidth of the Chinese currency versus the Euro's dollar.

There is a significant undergoing current of the reform of the Chinese financial system in general. You may have seen the article in the Wall Street Journal, talking about how now China is positioning itself to be one of the top three, if not end up being the largest gold trading facility. All these things are moving towards more liquidity within China, decoupling of the currency from certainly the U.S. dollar, and that is going to continue to add challenges.

Not is it just the Euro, but also there are other things like China out there. Brazil is still looking at it. These are issues that all corporations end up having to face, and will continue to have to face. This isn't an issue that is going to go away.

At the latter part of 2011, there was a strategic review done by Accenture looking at, what are the (inaudible 00:07:27) success factors for risk management in this new world?Some of those things without reading them. You've got to read through them yourself, and this would be certainly available. If you do have good risk management programs they are due to impact shareholder values.

The overall gist that I'm seeing here is that treasury is becoming continuously increasingly strategic and CEOs are recognizing that. CFOs are recognizing it. Shareholders need to be recognizing it certainly at the board level. The other part that one should take away from this thing is that treasury in a closed system, and people are recognizing them, cannot be as successful as in an open system where they are...
 
I know both Randal and Brian will, I'm sure, address this. They need to really be able to also talk to other areas of the institution in order to have a well-rounded strategic  treasury, because they'll need data out of the controller section, etc.

As one looks at risk management from a corporate point of view, treasury is becoming A) more strategic. B) You're seeing here, risk executives being, quite frankly, chief risk officers being established as a position because it grabs over numerous silos within the organization. It'll be very great and interesting to start getting some inputs also from Randal and Brian about that.

As we go to the final slide then, in preparation for this, and I think where we'll end spending the most time on is you really have to look at three areas that we want to address today with Randal and Brian as well. One is, we've talked about increased ethics volatility, and certainly the speed of change from the timing thereof will impact earnings per share. I'm already talking to companies who are worried about this quarter, Q3, purely because of what happened in the first ten days of the Euro dollar movement.

Increased global expansion, we talked about that already. Certainly the impacts of that will be on earnings per share. Increased global expansion, hopefully not as  significant, hopefully double-digit impacts on a growth perspective. One needs to be very aware of what are the risk implications for the benefit of the double-digit and how can you manage that? Then, lastly, increasing operational complexity, sometimes people are in the opposition modes, otherwise on the organic modes."

End partial: Managing Foreign Exchange Risk Webinar

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