Global Markets Guide to Foreign Exchange Markets HSBC

Global Markets Guide to Foreign Exchange Markets

HSBC Foreign Exchange 2008 Euromoney Poll HSBC is consistently ranked as one of the top banks in the world in FX. HSBC ranked #2 for Most Impressive Approach to FX , Who’s Best Where category in EMEA and Asia & Australia. We were ranked within the top 3 in 26 of the other categories which cements our overall ranking of 3 rd for qualitative criteria. · FX business operates out of our three main centers (New York, London and Hong Kong) · Our extensive geographic footprint (incorporating some 89 branches), and expertise in many local markets give us an additional and unique insight into developments all over the globe Top 3: GBP, HKD, CNY, Asian ccy’s, Middle East ccy’s Options Trading Strategies and new ideas Best FX-linked products Most innovative and original research and strategy The Americas * Europe * Asia * · New York · London · Hong Kong · Canada · France · Japan · Brazil · Germany · Australia · Argentina · Russia · China · Mexico · Turkey · Thailand EM Research and strategy · Chile · Israel · India Most Innovative Hedging Strategy · Bermuda · Dubai · Korea · Saudi Arabia · Singapore · South Africa Fwds: EM currencies, and both over and under 1 yr Research and Analytics on online platforms Note: * Not exhaustive lists 2

HSBC Foreign Exchange Market · In today’s global market place, foreign exchange plays a significant role: more than 3. 2 trillion U. S. dollars worth of currency is exchanged on a daily basis. . If this figure includes your dollars, how you conduct international business could significantly affect your bottom line. · Foreign Exchange is one of the most liquid traded markets, with hundreds of currency pairs. · Prices available 24 hours a day, 7 days a week. · No formal exchange for currencies. Trading is done over the counter in an interbank market and via brokers. · In this highly dynamic environment, HSBC plays an important role servicing customers across the globe. Our global presence, extensive footprint and local knowledge make us one of the best banks in FX. 3

HSBC Foreign Exchange Who Uses Foreign Exchange? ·Importers/Exporters –Importers pay in the foreign currency –Exporters receive payment in foreign currency ·Multinational corporations –Multinationals fund foreign subsidiaries and funds are repatriated back to parent companies ·International investors –International investors hedge interest payments with forwards ·Tour operators –Tour operators book foreign travel in the local currency ·Schools –Schools make and receive tuition payments in foreign currency 4

HSBC Foreign Exchange Why Use Foreign Exchange? · Improve profit margin – In agreeing to pay invoices in a foreign currency, US importers avoid paying the margins for currency fluctuation and conversion that foreign exporters usually build into their pricing. · Negotiate better pricing – Importers have the upper hand when they take the responsibility to pay a foreign supplier in local currency. · Reduce risk – Diversifying your international supplier base reduces the risks associated with doing business with a limited number of vendors, in a limited number of regions. · Competitive edge – Exporters enhance their customer base by allowing customers to pay in their local currency. 5

Identifying Foreign Exchange Exposure Understanding Foreign Exchange Exposures · A clear understanding of your foreign exchange exposure is necessary to assess risks. Exposures arise as a result of exchange rate volatility. · The main source of foreign exchange exposure for companies arises from meeting invoices for goods and services priced in a foreign currency, or receiving foreign currency for goods or services provided. Exposures can also arise from: – Competitors having a cost base and/or selling their products in a foreign currency – Overseas manufacturing plants or subsidiaries – Overseas subsidiaries' foreign currency borrowing or surplus cash balances · Exposure can materialize in a number of different ways: decreased USD cash flows or margins, EPS or balance sheet volatility, overseas contract cancellations, etc. 6

Spot and Forward Transactions Spot Transaction Currency Pairs Any currencies that are freely traded Foreign Exchange Limit Settlement limit required · A spot transaction is a binding obligation to buy or sell a certain amount of foreign currency at the current market rate. · Settlement is generally in two business days Example: – US client is buying € 1, 000 of imported goods from Germany – Client calls HSBC and agrees to buy EUR / sell USD at 1. 4675 – In two business days client delivers $1, 467, 500 to HSBC and HSBC delivers € 1, 000 to an account the client specifies 7

Spot and Forward Transactions Forward Transaction Currency Pairs All G 20 currencies, may not be available in certain EM currencies Tenor Varies by currency pair Foreign Exchange Limit Required · A forward transaction (or forward contract) is a binding obligation to buy or sell a certain amount of foreign currency at a pre-determined rate of exchange, on a certain date in the future. · The price is based on the spot rate with an adjustment (forward points) which represents the interest rate differential between the two currencies being exchanged. · In certain countries, forwards are available on a non-deliverable basis due to restrictions. The market will determine the forward curve in such cases, rather than interest rates. Example: – US client is buying goods from a customer in Brazil for BRL 10, 000 (nondeliverable) in 6 months. – Client calls HSBC and agrees to buy BRL / sell USD at 1. 8700 (spot 1. 8070) in 6 months – In six months BRL fixes at 1. 9000. Client pays HSBC USD 84, 435. 69 and converts money locally in Brazil 8

Spot and Forward Transactions “Time Option” Forward Transaction Currency Pairs All G 20 currencies, may not be available in certain EM currencies Tenor Varies by currency pair Foreign Exchange Limit Required · A “time option” forward transaction is a binding obligation to buy or sell a certain amount of foreign currency at a pre-determined rate of exchange, for a “window” dates in the future rather than a specific value date. · Allows for a specific time period during which cash flows can occur at a predetermined rate of exchange. – Windows are typically 30 days. Example: – US client is receiving payment from a customer in the UK for GBP 10, 000 on T+30 terms but is uncertain on the exact date of payment. – Client calls HSBC and agrees to Sell GBP / buy USD at 1. 5130 (spot 1. 5134) in with settlement for some date between today and 30 days from now. – In 25 days customer makes payment. Client pays HSBC GBP 10, 000 and receives USD 15, 130, 000. 9

Hedging & Risk Management Short Form Master Agreement · Non-market HSBC-generated document · For use with US-domiciled ‘mom and pop’ corporate customers only (may pose tax-related issues if used for offshore customers - IFEMA/FEOMA/ISDA are preferred in those cases). · Short-dated, infrequent FX trading only (e. g. , 10 trades or less per year, limited tenor - 6 months) · Payment and close-out netting provisions, but not recognized in the industry or within HSBC as a viable netting contract (i. e. no legal opinion support) · No collateralization · Unilateral treatment in favor of HSBC; terms typically non-negotiable · Allows for payments to be made into escrow · Covers FX spot, options, forwards · Normally used for SME and core MME clients 10

Hedging & Risk Management Developing a Strategy · Having a clear appreciation of a company’s foreign exchange exposures allows the identification of the exposures as they occur, and an assessment of the potential impact on a company. · Companies can hedge these exposures to minimize the foreign exchange impact on their financials, cash flows, margins, EPS, etc. . · Using the products described here there are four risk management alternatives available: – Spot Transaction. – Forward Transaction – Purchasing Vanilla Options – Structured Products (ex. Collars, Participating Forward, etc. ) 11

Hedging & Risk Management Developing a Strategy “Why not just use a forward, I am fully hedged and can focus on my underlying business…” · A forward implies a strong bias with linear returns · There is an opportunity cost with a forward which mirrors that of doing nothing (remaining unhedged); – Executing a Forward contract represents an implicit bet that today’s market rates are better than tomorrow’s levels – If a company is 100% sure that FX rates will not go their way, an FX Forward offers the ideal solution – If a company is 100% sure that FX rates will go their way, then doing nothing is the ideal approach – If a company is unsure about where FX rates are going, option-based products offer protection & flexibility FX options on the other hand require initial premium (many times a hurdle for risk managers) 12

How is Foreign Exchange Used? · Use forward pricing to negotiate sales contracts · Lock in forward when sales contract is firm · Match foreign exchange product to your particular trade cycle and predicted cash flows 13

What is the Bottom Line? · Hedging foreign exchange risk is not speculating. Hedging eliminates the uncertainty of the FX rate that will be used by a company in the future. · A Foreign Exchange Forward contract allows a company to pay or receive foreign currency in the future at an exchange rate agreed upon today. · By locking in the rate, a company is protecting profits margins and eliminating uncertainty of the value of cash flows. · A company will know exactly how many U. S. dollars they will pay or receive in the future, so they can better forecast their business’ cash flow cycle and plan operations accordingly. 14

Disclaimer PRODUCTS AND SERVICES ARE OFFERED BY EITHER HSBC BANK USA, MEMBER FDIC; OR HSBC SECURITIES (USA) INC. A REGISTERED BROKER DEALER AND A REGISTERED FUTURES COMMISSION MERCHANT. HSBC SECURITIES (USA) INC. IS A MEMBER OF THE NEW YORK STOCK EXCHANGE, NASD AND SIPC AND REGULATED BY THE SFA FOR THE CONDUCT OF INVESTMENT BUSINESS IN THE UNITED KINGDOM. HSBC BANK USA AND HSBC SECURITIES (USA) INC. ARE MEMBERS OF THE HSBC GROUP. ANY MEMBER OF THE HSBC GROUP MAY FROM TIME TO TIME UNDERWRITE, MAKE A MARKET OR OTHERWISE BUY OR SELL AS PRINCIPAL SECURITIES OR OTHER INSTRUMENTS MENTIONED HEREIN, OR TOGETHER WITH THEIR DIRECTORS, OFFICERS AND EMPLOYEES MAY HAVE EITHER A LONG OR SHORT POSITION IN THE SECURITIES, COMMODITIES CURRENCIES OR OTHER INSTRUMENTS MENTIONED IN THIS REPORT OR FUTURES OR OPTIONS CONTRACTS CONVERTIBLE INTO SECURITIES OR OTHER INSTRUMENTS MENTIONED IN THIS REPORT, OR MAY PERFORM OR SEEK TO PERFORM INVESTMENT BANKING SERVICES FOR THOSE COMPANIES MENTIONED HEREIN. THE INFORMATION IN THIS REPORT IS DERIVED FROM A VARIETY OF SOURCES WE BELIEVE TO BE RELIABLE; HOWEVER, WE CANNOT GUARANTEE ITS ACCURACY OR COMPLETENESS, NOR SHALL WE BE LIABLE FOR ANY INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES INCLUDING BUT NOT LIMITED TO ERRORS (INCLUDING ERRORS OF TRANSMISSION), INACCURACIES, OMISSIONS, CHANGES IN MARKET FACTORS OR CONDITIONS, OR ANY OTHER CIRCUMSTANCES BEYOND OUR CONTROL. THE INFORMATION, ANALYSIS AND OPINONS CONTAINED HEREIN CONSTITUTE OUR PRESENT JUDGEMENT WHICH IS SUBJECT TO CHANGE AT ANY TIME WITHOUT NOTICE. THIS REPORT IS INTENDED SOLELY FOR THE INFORMATION OF THE SPECIFIED ADDRESSEE, IS FOR PRIVATE CIRCULATION AND NOT INTENDED FOR USE BY PRIVATE CLIENTS AS DEFINED BY THE SFA. THIS IS NOT A RECOMMENDATION, OFFER OR SOLICITATION TO PURCHASE OR SELL ANY SECURITY, COMMODITY, CURRENCY OR OTHER INSTRUMENT. THIS REPORT DOES NOT CONSIDER SPECIFIC OBJECTIVES, CIRCUMSTANCES OR NEEDS OF INDIVIDUAL RECIPIENTS OF THIS REPORT SHOULD SEEK FINANCIAL ADVICE REGARDING THE APPROPRIATENESS OF INVESTING IN ANY SECURITY, COMMODITY, CURRENCY OR DERIVATIVE INSTRUMENT OR STRATEGY CONTAINED HEREIN. SECURITIES SPOT AND FORWARD FOREIGN EXCHANGE, CURRENCY OPTOINS, COMMODITIES AND CERTAIN OTHER PRODUCTS DISCUSSED HERIN ARE NOT INSURED BY THE FDIC AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF HSBC BANK USA, ARE NOT GUARANTEED BY HSBC BANK USA; AND ARE SUBJECT TO INVESTMENT RISKS INCLUDING POSSIBLE LOSS OF PRINCIPAL. 15