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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference Supply Chain – Management Practices for Curr

Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference Supply Chain – Management Practices for Currency. Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference. Dealing in foreign currencies offers rewards and risks

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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference Supply Chain – Management Practices for Curr

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  1. Indiana Logistics Summit&52nd Dr. LL Waters Transportation ConferenceSupply Chain – Management Practices for Currency

  2. Indiana Logistics Summit &52nd Dr. LL Waters Transportation Conference • Dealing in foreign currencies offers rewards and risks • Treasury risk management has to be seen within an integrated risk framework Reference: “CFO – Architect of the Corporation’s Future”, John Wiley & Sons, 1997

  3. Indiana Logistics Summit &52nd Dr. LL Waters Transportation Conference • Business risk is a matter of perspective. • Finance, operational managers, institutional investors, all see risk differently.

  4. Indiana Logistics Summit &52nd Dr. LL Waters Transportation Conference • Business risk arises from the likelihood that something good won’t happen, as well as the threat that something bad will happen.

  5. Indiana Logistics Summit &52nd Dr. LL Waters Transportation Conference • The population of risks can be divided into 5 (five) main groups: • Strategic Risks of plans fail • Financial • Operational Risks of human errors or omission • Commercial Risks of business interruption • Technical Risks of physical assets failure

  6. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference Financial Risk • Risks of financial controls fail • Treasury risks • Lack of counterparty / credit assessment • Sophisticated fraud • Systems failure • Poor inventory/receivables reconciliation

  7. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference • All types of risk affect the strategic direction and ultimately the company’s ability to generate shareholder value. • In the past – risk might have been the insurance manager’s responsibility. • Financial control mattes are the treasurer’s responsibility. • Consumer relations might have been the sales and marketing responsibility.

  8. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference • Today functionally segregating risk management is out-dated! • An integrated view of business risks and risk management is required.

  9. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference • What is the reason for such a change? • More and more people study business performance • Banks, investors, consumers demand more evidence how the company plans to maintain a strong balance sheet.

  10. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference • Competitive pressures escalate • Economic use of limited resources requires the company to lower its exposure of risks, which it is not in the business to take.

  11. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference • Risk management can create new advantages • The investment community may favor a stock, if it understands the rationale underlying the total risk management effort.

  12. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference • Individual loss or gain can match business loss or gain. • Senior executives with successful risk taking enjoy better career prospects.

  13. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference • Corporate fortune can reverse overnight. • News hits the stock market, a company’s position can flip- flop instantaneously.

  14. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference • Global regulations grow more complex • Corporations have the obligation to disclose to shareholders which risks they are in business to take, and what they are doing to manage them.

  15. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference • Risk management means dealing with uncertainty. • What can go wrong, or fail to go right? • How often? • What counter-measures exist, or could be installed? • How likely are they to be effective? • What about risks we don’t know? • Awareness of what risks might arise, where and crucially, how material they are to the company.

  16. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference • Focus on materiality, not source • Risk management requires an integrated approach • Elimination of risks, eliminates opportunity for profits • Greater risks bring greater returns

  17. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference • Corporate management decides on risk appetite. • Is the risk consistent with the company’s current philosophy? • With its history of gains and losses? • With investor’s understanding of how much is at risk? • With management’s skills and experience? • With the business’s cash flow, debt position, balance sheet strength – and so on?

  18. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference • Foreign currency risk as part of risk management • Foreign currency-a currency other than the functional currency of the business. • Foreign currency transactions require settlement in a currency other than the functional currency. • An exchange gain or loss occurs when the exchange rate changes between the purchase date and the sale date.

  19. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference • How can you avoid/manage foreign exchange gains/losses? • Foreign exchange exposure occurs through • Economic exposure • Transaction exposure • Translation exposure

  20. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference Foreign exchange gain and loss can be managed. • Through avoidance • customer’s may not like it • Leading and Lagging • Netting • Bilateral • Multilateral

  21. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference • Re-invoicing • using a central office, which takes over foreign exchange exposure. • Hedging • By forward contracts • By purchase of futures • By purchase of options • By engaging swap contracts

  22. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference • Examples of foreign currency management • By compensating business arrangements • BMW buys parts in the US for Europe • BMW manufactures cars in the US • Siemens’ management of exports and imports

  23. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference • By hedging • Mercedes Benz • Porsche • VW

  24. Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference • Strategic approach to currency management • Centralize foreign exchange/ finance activities around the world to better realize exposures and fully integrate treasury operations with underlying business process systems. Thank you for your attention.

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