Foreign Exchange Healthcare Best Practices Discussion exchange transactions can be highly risky, and...
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Foreign Exchange April 27, 2016 Healthcare Best Practices Discussion
Transcript of Foreign Exchange Healthcare Best Practices Discussion exchange transactions can be highly risky, and...
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Foreign Exchange
April 27, 2016
Healthcare Best Practices Discussion
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Today’s agenda
• Introduction
• Foreign Exchange Landscape
• Hedging 101
• Solutions
• Case Study
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Foreign Exchange Landscape
Peter Compton Senior Foreign Exchange
Advisor
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Euro - EUR/USD 1 Euro buys 1.13 US Dollars
British Pound - GBP/USD 1 Pound buys 1.43 US Dollars
Canadian Dollar - USD/CAD 1 US Dollar buys 1.28 Canadian Dollars
Swiss Franc - USD/CHF 1 US Dollar buys 0.97 Swiss Francs
Australian Dollar- AUD/USD 1 Australian Dollar buys 0.77 US Dollars
Swedish Krona - USD/SEK 1 US Dollar buys 8.14 Swedish Krona
Japanese Yen - USD/JPY 1 US Dollar buys 109 Japanese Yen
Frequently used Foreign Currencies for Life Sciences Companies
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Life Sciences Company FX Exposure Causes BioTech Distributors, Partnerships, Materials
Drug Discovery International Clinical Trials
Medical Device Manufacturing Contracts, R&D
Healthcare IT Overseas Developers
Life Sciences Companies and Foreign Currencies
Most Companies Eventually Have FX Exposure: Sales/Receivables, Contractors, Vendors
Acquisitions
Investors
Funding Subsidiaries
Repatriating Profits
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What Drives Currency Exchange Rates
• Economics
– GDP Growth
– Interest Rates Expectations (Higher Rate = Stronger Currency)
– Geopolitical Risks
• Market Participants in $5 Trillion Global Market
– Speculators
– Global Investors and Sovereign Wealth Funds
– Central Banks (Intervention)
– Corporations (8%)
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EUR: European Economy Weaker than US Economy
‣ Deflation a problem in Europe. Quantitative easing negative for the euro.
‣ Euroland negative interest rates vs. the US where interest rates are headed higher.
‣ Geopolitical risks favor euro?
Source: Bloomberg.
Price of 1 euro in US Dollars
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
1.1262
+80.55% (+13.80% ann.)
-20.77%
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GBP: It’s all about the “Brexit”
‣ June 23, 2016 referendum on UK remaining in EU. Uncertainty will lead to GBP weakness.
‣ The Fed raising rates ahead of the UK Monetary Policy Committee.
‣ Huge support at 1.40.
Source: Bloomberg.
1.35
1.4
1.45
1.5
1.55
1.6
1.65
1.7
1.75
1.4157 UK elections
Brexit uncertainty
Price of 1 Pound in US Dollars
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Hedging 101
Nate Wyne Senior Foreign Exchange Advisor
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FX Risk Management
• Primary Goal: Cash-flow / Earnings Certainty
– Mitigate fluctuations in the USD value of foreign denominated exposures
– NOT speculation on direction of foreign currency rates
• A prudently implemented risk management policy, consistently
applied, seeks to achieve discrete periods of cash flow certainty
More
Stable/Certain
Cash Flows
More
Stable/Certain
Earnings
Higher
Firm
Valuation
= =
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Foreign Exchange Risk Management • Non-functional Currency Exposure
– Foreign revenue billed/collected out of US entity
• Fluctuations in FX rates cause significant false noise in financial statements
• Primary Concerns: Re-measurement Risk & Cash-flow Risk
• Control of Foreign Exchange G/L line
Key constraint: Lean finance team, fast moving company. Hedge program must be easy to administer.
• Isolate FX volatility from earnings to provide key business insights on core business
vs. market noise.
• Streamline FX operations to allow finance teams to focus on a way forward under a
solid policy with clearly defined roles/operations.
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FX Risk Management – Healthcare-specific Challenges
Board of Director Expectations Usually Exclude FX Volatility
– Given today’s volatility this becomes a losing battle.
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Hedging Foreign Exchange – Instruments Used
• FX Forwards / Swaps
– Traditional
– Window
– Non-Deliverable (NDF)
• FX Options
• Structured Products (combination of purchased/sold options)
Most (over 90%) hedging companies use forwards (and swaps) for hedging.
Simple, efficient, transparent, no upfront cost, simplifies hedge accounting treatment.
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FX Risk Management: A Guiding Framework
• Identify Exposures
– Forecasted cash flows by currency by entity. Consider offsetting payables / receivables
– Gather data on accounting exposures (re-measured assets / liabilities)
• Evaluate Risks
– Compare to management tolerance
– Place in context of risk management goals. (i.e. EPS, FX G/L line, margin risk, etc.)
• Devise Strategy
– Simple, transparent Forward contact structure is a standard
– Determine hedge ratio and duration. Ex. 50% of forecasted 2015 Revenue
– Review special hedge accounting treatment needs
• Implement and Monitor
• Roll Structure Forward as Existing Contract Mature
– Methodically roll structure forward to maintain consistent hedge ratio and duration
• Ex. Rolls may occur every month or quarter based on risk management goals.
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Solutions
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Spot Contracts – Basic Payments/Collections
An Agreement to Exchange One Currency for Another Currency
– Trade Date is Today
– Settlement Date is typically two days later (Trade date pulse two days) (SVB T+1)
– US Dollars automatically debited from operating account
– No special accounting for derivative contracts
– Although Payment instructions differ around the world – FX Spot Trades are
standardized
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Forward and Forward Window Contracts Hedge currency exposure for more predictable cash flows
Benefits of using Forward Contract
– Can establish up to 100% certainty the
exchange or conversion rate of a currency on a
future settlement or delivery date
– Inexpensive method of managing currency risk
– Offers flexibility with regard to the amount of the
currency exposure to be hedged
– The buyer of the contract can exercise multiple
drawdowns until the contract amount is used
up.
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Non-Deliverable Forward (NDF) Contacts
– Like an outright FX Forward only net settled in USD
– Some currencies don’t have an efficient outright FX Forward market (INR, BRL, CNY)
– Hedge a subsidiary’s FX exposure at parent level
– Balance Sheet hedging or Cash Flow hedging
Example: Hedge a Renminbi (Yuan) Expense at USD/CNY 6.5 due in 90 Days
Enter NDF to Buy CNY 6,500,000 and Sell USD 1,000,000
Calculation of NDF Net Settlement Amount
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Swaps Manage Cash Flow & Maturity Dates for Foreign Currency Transactions
Benefits of FX Swaps
– Avoidance of unnecessary foreign exchange losses
– “Borrow” foreign currency by buying the currency spot and simultaneously agreeing to
sell the currency back at a future date
– Accelerate the settlement of an existing forward contract
– Extend or delay the settlement of an existing forward contract
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Over-the-Counter Options Contract Hedge Currency Exposure with Tailored Options Contracts
Benefits of doing Over-the-Counter (OTC) Options
– Provides insurance against unfavorable currency movements
– Unlimited gains potential
– Hedge risk with the possibility to reduce or eliminate premiums
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Foreign Currency Account (FCA):
A deposit account where funds can be held in a foreign currency
Buy and hold foreign currency until needed for expenses
Provides certainty with regard to FX rate (preserve cash, meet budget)
Domiciled in the Untied States
Able to wire currency into and out of FCA account
No need for derivative accounting/disclosures
Creates a foreign currency denominated asset which will gain/lose value
Does not allow for benefit of favorable movement in FX rate
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Case Study
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FX Healthcare Client Case Study - Tandem
Overview:
Tandem is a medical device company with an innovative approach to the design,
development and commercialization of a family of products for people with insulin-
dependent diabetes.
Tandem FX Hedging:
Why are we hedging our foreign currency exposures: one of our vendors is located in
Finland. We purchase high dollar large equipment form them. The EUR amount of these
purchases in known months in advance of payment. We enter into forward contracts to
protect our budget in hopes of avoiding budget variances due to fluctuations in the foreign
currency market.
Client:
Denise Lamas, Sr. Manager,
General Accounting
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Questions?
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Appendix
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Peter Compton
Senior Foreign Exchange Advisor
Silicon Valley Bank
617-630-4136
Peter Compton is a senior foreign exchange advisor
for Silicon Valley Bank’s global financial services
group, and has been with SVB since 2007. He helps
clients design and implement hedging strategies for
foreign currency exposures. Compton has over 20
years experience in global financial markets.
Before joining Silicon Valley Bank, Compton spent
seven years working in the European equity markets.
Based in Germany, he spent four years with HSBC
and three years as Head of Equity Sales for ABN-
AMRO in Frankfurt. Prior to his work overseas,
Compton spent seven years with Bank of America in
San Francisco as an equity and fixed income
derivative specialist.
Compton holds a bachelor's degree in business and
management from the University of Rhode Island and
a Master's of Business Administration from San
Francisco State University.
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Nate Wyne
Senior Foreign Exchange Advisor
Silicon Valley Bank
310.237.3489
Nate Wyne is the Southern California foreign
exchange advisor for Silicon Valley Bank. Nate hold a
bachelor’s degree from the University of Utah in
international studies for business.
Nate partners with his clients to create and implement
sound risk-management practices around foreign
exchange and cash management.
After completing his undergraduate degree, Nate
pursued a career in retail banking before moving to
commercial and eventually corporate banking. With
13 years of banking experience across the full gamut
of advisory roles – Nate enjoys helping growing
businesses focus on what they do best.
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Disclaimer
Foreign exchange transactions can be highly risky, and losses may occur in short periods
of time if there is an adverse movement of exchange rates. Exchange rates can be highly
volatile and are impacted by numerous economic, political and social factors, as well as
supply and demand and governmental intervention, control and adjustments. Investments
in financial instruments carry significant risk, including the possible loss of the principal
amount invested. Before entering any foreign exchange transaction, you should obtain
advice from your own tax, financial, legal and other advisors, and only make investment
decisions on the basis of your own objectives, experience and resources. Opinions
expressed are our opinions as of the date of this content only. The material is based upon
information which we consider reliable, but we do not represent that it is accurate or
complete, and it should not be relied upon as such.
©2016 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC
and Federal Reserve System. SVB>, SVB Financial Group, and Silicon Valley Bank are
registered trademarks.
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Thank you
www.svb.com
