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Exporters Hedging Program for Risk Management in Foreign Exchange

Explore the Foreign Exchange Insurance Protection and Forward Rate Protection options offered by the Development Bank of the Philippines to help exporters hedge against currency fluctuations and mitigate risks. Learn how these programs work through detailed scenarios and examples.

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Exporters Hedging Program for Risk Management in Foreign Exchange

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  1. Afternoon Delight“The way to succeed is by being a better evaluator and manager of risk than competition”Glenn C. Albert

  2. 60 YEARS OF DEVELOPMENTAL BANKING

  3. DEVELOPMENT BANK OF THE PHILIPPINES • COUNTRY’S PREMIERE DEVELOPMENT • FINANCIAL INSTITUTION • MAJOR PROVIDER OF MEDIUM TO LONG - • TERM FUNDS FOR: • - INFRASTRUCTURE AND LOGISTICS • - ENVIRONMENT • - SMALL AND MEDIUM ENTERPRISE DEV’T. • - SOCIAL SERVICES (HOUSING, HEALTH • CARE, EDUCATION) • FIRST PHILIPPINE BANK TO BE ISO 14OO1 • FINANCIAL INDICATORS AS OF 12-31-O6 • - P235 BILLION IN RESOURCES • - P 35 BILLION AUTHORIZED CAPITAL • - P 3.7 BILLION NET INCOME

  4. DOF DTI DBP DBP HEDGING PROGRAM FOR EXPORTERS TO HELP EXPORTERS HEDGE THEIR US DOLLAR INFLOWS AGAINST THE FLUCTUATIONS OF FX RATES

  5. TWO OPTIONS FOR HEDGING EXPORTERS • FOREIGN EXCHANGE INSURANCE PROTECTION • II. FOREIGN EXCHANGE FORWARD RATE PROTECTION

  6. FOREIGN EXCHANGE INSURANCE PROTECTION ALLOWS THE EXPORTER THE RIGHT BUT NOT THE OBLIGATION TO SELL HIS US DOLLARS AGAINST PHILIPPINE PESOS TO DBP AT A SPECIFIED PRICE ON A SPECIFIED DATE • TERM OF 1 TO 3 MONTHS • MINIMUM AMOUNT OF $1O,OOO.OO • PROTECTION RATE • INSURANCE FEE BASED ON MARKET RATE

  7. EXPORTERS HEDGING PROGRAM On DAY 1, exporter and DBP agree on the following: Protection Rate : USD/PHP 46.00 USD/PHP Rate at Trade Date : USD/PHP 46.20 Notional Amount : $ 10,000.00 Insurance Fee : To be determined (based on market conditions) EXAMPLE OF FOREIGN EXCHANGE INSURANCE PROTECTION *Assuming rate of option fee based on market conditions is : 0.80% Insurance fee in USD = 0.8% x Notional Amount = 0.8% x $10,000 = $ 80

  8. EXPORTERS HEDGING PROGRAM SCENARIO 1: Peso Depreciates from 46.20 46.40 On MATURITY DATE, USD/PHP exchange rate : 46.40 Protection Rate : 46.00 EXAMPLE OF FOREIGN EXCHANGE INSURANCE PROTECTION Exporter gains, he may sell his $10,000 at 46.40 to DBP ACTUAL GAIN = (Exchange Rate at MATURITY) – (Protection Rate) – (Insurance Fee in FX TERMS) = P 46.40 – P46.00 – P 0.37 ($80 xP46.20)/$10,000 = P 0.03 per dollar

  9. EXPORTERS HEDGING PROGRAM SCENARIO 2: Peso Appreciates from 46.20 45.00 On MATURITY DATE, USD/PHP exchange rate : 45.00 Protection Rate : 46.00 EXAMPLE OF FOREIGN EXCHANGE INSURANCE PROTECTION Exporter is covered at the protection rate, he sells his $10,000 at 46.00 to DBP OPPORTUNITY GAIN = (Protection Rate) - (Exchange Rate at MATURITY) - (Insurance fee in FX TERMS) = P 46.00 – P45.00 – P 0.37 = P 0.63 per dollar

  10. FOREIGN EXCHANGE FORWARD RATE PROTECTION A foreign exchange contract where only the net difference between the agreed dollar/peso forward rate and the market rate shall be settled at maturity

  11. FOREIGN EXCHANGE FORWARD RATE PROTECTION • TERM OF 3O DAYS TO 12 MONTHS • MINIMUM AMOUNT OF $1O,OOO • NEEDS CREDIT APPROVAL FROM DBP

  12. EXPORTERS HEDGING PROGRAM FOREIGN EXCHANGE FORWARD RATE PROTECTION PESO NET SETTLEMENT • Peso Net Settlement Amount = Fixing Rate – NDF Rate • FIXING RATE is the USD/PHP RATEat Fixing Date • Fixing Date -One business day prior to Maturity Date • Fixing Rate is obtained from the AM PDS weighted average rate on the REUTERS page PDSPESO1 • Peso Net Settlement Amount will be paid on the maturity date of the NDF Contract

  13. EXPORTERS HEDGING PROGRAM FOREIGN EXCHANGE FORWARD RATE PROTECTION ON SETTLEMENT DATE • If Fixing Rate > FX Forward Rate, then USD/PHP Rate (Fixing Rate) : 46.50 FX Forward Rate : 46.22 (computed in previous example) EXPORTER DBP Exporter Pays P 0.28 x Notional Amount to DBP EXAMPLE: FX Forward Rate : 46.22 Notional Amount : $1O,OOO Exchange Rate : 46.5OExporter Pays: (46.5O - 46.22) x $1O,OOO = P 2,8OO

  14. EXPORTERS HEDGING PROGRAM FOREIGN EXCHANGE FORWARD RATE PROTECTION ON SETTLEMENT DATE • If Fixing Rate < FX Forward Rate, then USD/PHP Rate (Fixing Rate) : 46.00 FX Forward Rate : 46.22 EXPORTER DBP DBP Pays P 0.22 x Notional Amount to Exporter EXAMPLE: FX Forwrd Rate = P 46.22 Notional Amount = $1O,OOO USD/PHP Rate = 46.OO DBP Pays: (46.22 - 46.OO) x $1O,OOO = P 2,2OO

  15. Evaluation Criteria • DBP shall finance projects which are technically, financially and economically viable and environment-friendly

  16. BORROWER RISK RATING • CASH • Financial ratios • Balance sheet items • PRODUCTION • No. of suppliers • Inventory turnover • Potential to increase • production and • service capacity • Quality of business • location • ADMINISTRATION • Mgmt. Experience • Owner’s health • Succession plan • Personal networth • Attitude towards • banks CAMP ANALYSIS • MARKET • Market Conditions • Clientele • Growth in sales

  17. RISK-BASED CREDIT POLICY • Does due diligence on the borrower’s: • S tability • E ntrepreneurship • R eputation • R epayment Behavior • Sources information from character references, background and credit investigation

  18. INTERESTED? Please Contact: Senior Vice President Corazon D. Conde Head, SME Department Development Bank of the Philippines Tel. No. 815-1520 OR SAVP Dulce Ranosa Celia S. Patilan Tel. Nos. 818-9511 locals 2557/2529 (Trunkline) 840-3435/ 892-5727 (Direct Line)

  19. THANK YOU!

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