t Hedging Tutorial part 1 aug7

Slide 1: 

Currency Hedging for Capital Projects: Hedging Overview and Process Changes for 2011 Part 1: Hedging Overview

Currency Fluctuation (No Hedging): 

Currency Fluctuation (No Hedging) Negotiate in Euros Pay invoice in Euros €1M Dollar Weakens $1.4M €1M $ ? $1.6M $200,000 Over Budget! Dollar Strengthens $1.2M $200,000 Under Budget! Track budget in dollars €1 = $1.4 €1 = $1.6 €1 = $1.2

Currency Fluctuation: Offset by Hedging: 

Currency Fluctuation: Offset by Hedging Set a budget in Euros Pay invoice in Euros $1.4M $1.6M Project Expense Hedging Activity $1.4M $1.6M $200K LOSS On Project Expense $200K GAIN On Hedging Activity $ / € $ / € Exchange rate: €1 = $1.4 Exchange rate: €1 = $1.6

Currency Fluctuation: Offset by Hedging: 

Currency Fluctuation: Offset by Hedging Dollar weakens Project Expense $ $ / € Unfavorability in Project Expense

Currency Fluctuation: Offset by Hedging: 

Currency Fluctuation: Offset by Hedging Dollar strengthens Project Expense $ / € F avorability in Project Expense

Currency Fluctuation: Offset by Hedging: 

Currency Fluctuation: Offset by Hedging Dollar weakens Project Expense $ / € Unfavorability in Project Expense Hedging Gain $ / € F avorability in Project Expense Impact of exchange rate - driven fluctuations is mitigated

Currency Fluctuation: Offset by Hedging: 

Currency Fluctuation: Offset by Hedging Dollar strengthens Project Expense $ / € Favorability in Project Expense Hedging Loss $ / € Unf avorability in Project Expense Impact of exchange rate - driven fluctuations is mitigated

Conditions for an Offset to Match: 

Conditions for an Offset to Match PO Date Pay Date (1.4 -1.2) * 1,000,000 = $200,000 increase in project expense Exchange rate €1 = $1.2 Exchange rate €1 = $1.4 € 1M Invoice Rate change * Expense in Euros (at PO date) = exchange rate-driven change in project expense To Hedge a Correct Offset: 1. Beginning & End Rates Must Match (So, the Timelines Must Match.) And, 2. The Hedged Amount Must Match The timeline and the amount for the hedge must match the timeline and anount of the project expense exactly.

Conditions for an Offset to Match:: 

60 Days Conditions for an Offset to Match: PO Date Pay Date Exchange Rate – Driven Change in Project Expense Offsetting Gain or Loss from Hedging Activity Start and end date must match Amount must match Additional Hedges: 1) Amount is the same 2) New hedge placed same day old hedge is released

Hedging Review: 

Hedging Review Project expense is negotiated in foreign currency ( eg , Euros) Projects are tracked and evaluated Dollars Even when projects stay within budget in Euros, fluctuations in exchange rates impact the project expense in Dollars Hedging is not “betting on currency markets” when used as an offset to currency-driven fluctuations in project expense Think of hedges as “anti-bets” that mitigate volatility Increases in project expense are mitigated by gains in hedging activity Decreases in project expense are mitigated by losses in hedging activity Hedged amounts & timelines must match project expense timelines