Actively Managing Foreign Exchange

ITTI TIII IITT ITII II 1000 ACTIVELY MANAGING FOREIGN EXCHANGE 24 GPS Capital Markets approached a large US based retail chain that was experiencing rapid growth throughout Canada. The Company was happy with their current FX process and saw no need for change. The Company's major expense was a reoccurring monthly accounts receivable from its Canadian subsidiary for approximately $20MM. This represented finished goods products the subsidiary purchased from the parent. The Company felt that hedging their FX exposure would be too time consuming for their treasury department and were unwilling to hedge. 24 1-Month CAD Graph At the time of the analysis, the Canadian Dollar had been quite volatile over the prior two years. It had made a 28 percent move in just two years, which deeply impacted The Company. Their current process was to exchange their funds on the last day of each month. This Process caused an additional problem." Please change the entire sentence to the following: "This process was problematic because the parent would sell product to the subsidiary throughout the month and record the transaction of that day's FX rate. Periodically, this would result in a significant FX gain or loss, due to the translation occurring on the last day of the month. Though The Company had no appetite for hedging, they were interested to see if there was a way to obtain more favorable exchange rates and minimize FX gains and losses. Goals The Company asked GPS to achieve the following: Improve the foreign exchange rates received on a monthly basis Mitigate the FX Gain/Loss they were incurring on a monthly basis 25, Challenges ------ 25 Unfortunately, solving both of these problems simultaneously creates a challenge för a company that is unwilling to hedge their exposure. The simplest way to manage the FX Gains/Losses for The Company was to hedge their A/P as they would incur them on a daily basis. In this manner, they could directly match terms. This would mitigate mark-to-market issues as they would have settled all outstanding contracts at month-end. However, the simple solution of hedging was outside of their comfort level. Solution Our solution was unique and enabled them to accomplish both of their goals. Knowing that they needed to exchange at least 20MM CAD at each month-end, GPS suggested a two-tiered trading strategy as a solution. First, a form of dollar cost averaging that would more accurately approximate the average rate for the period. Secondly, GPS would actively manage these trades throughout each trading day to maximize their value on each transaction. To help alleviate the burden on The Company's treasury staff, GPS would manage this exposure, book the deals and only give the company a single month-end contract. Outcome 90 After one year of having GPS manage The Company's foreign exchange, they did a review of GPS and how well the new methods had helped achieve their goals. The Company had reduced its FX Gains/Losses by 80 percent. The exchange rates they were now receiving were significantly better than the previous benchmark received on the last day of the month. So, in addition to achieving reduced volatility on financial statements, The Company was able to receive a realized FX Gain of $4,560,000 in one year. GPS £I$1 ------ !! %24