Foreign Exchange Risk Management

• Importers that purchase goods or services overseas and pay in a foreign currency.
• Exporters that sell merchandise outside the United States and are paid in a foreign currency.
• Organizations that receive foreign-denominated dividends or royalties.
• Businesses that invest in foreign securities or make capital infusion payments and/or are involved in a foreign acquisition where the exchange of payment will not be in U.S. dollars.

Forward contracts can be customized in a variety of ways. All forward contracts protect against adverse currency fluctuation by locking in an exchange rate. However, customized product structures provide for flexibility in timing and hedging opportunities in regulated markets.

• Window forward— Allows you to select a time frame (typically 30 days) during which you can draw down and make payment from an existing contract at the pre-agreed-upon exchange rate.
• Non-deliverable forward— Allows you to hedge foreign currency risk where no traditional forward market exists. It is a synthetic type of hedge that is net settled in U.S. dollars. No delivery of foreign currency will occur under this type of forward contract.

• Importers looking to reduce the cost of foreign payables.
• Exporters looking to increase the value of foreign currency receivables.
• Businesses that need to protect their budget at a defined rate, while benefiting from favorable currency moves.
• Businesses that need to accommodate different views on currency direction, yet still meet hedging requirements.
• Businesses that want to take advantage of positive currency fluctuations but do not want to pay a premium upfront.

Your company protects against a strengthening euro by executing a collar with a 1.10 floor and 1.15 cap expiring in 3 months. If at expiry the EUR spot is:

• Above 1.15, you purchase EUR at 1.15.
• Below 1.10, you purchase EUR at 1.10.
• In between this range, you purchase EUR at the prevailing market rate.

• Importers looking to reduce the cost of foreign payables.
• Exporters looking to stabilize the value of foreign currency receivables.
• Businesses that need to protect their budget at a defined rate, while benefiting from favorable currency moves.
• Businesses that need to accommodate different views on currency direction, yet still meet hedging requirements.
• Businesses that want to take advantage of positive currency fluctuations with no upfront premium.

Your company protects against a strengthening euro by executing a participating forward contract with a 1.15 cap and a 50% participation level expiring in 3 months. If at expiry the EUR spot is:

• Above 1.15, you purchase 100% of your EUR at 1.15.
• Below 1.15 (for example, 1.05), you purchase 50% of your EUR at 1.15 and the balance at 1.05, creating a blended rate of 1.10.