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2010 AFI Convention

2010 AFI Convention Combating Currency Chaos Patricia Lifson First Vice President Israel Discount Bank New York US Dollar trading since September 11, 2001

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2010 AFI Convention

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  1. 2010 AFI Convention Combating Currency Chaos Patricia Lifson First Vice President Israel Discount Bank New York

  2. US Dollar trading since September 11, 2001 On September 11, 2001, in a series of coordinated suicide attacks by al-Qaeda upon the United States, the treacherous acts killed thousands, injured even more, and changed the course of the United States Dollar forever. The US Dollar had been considered a safe haven. In a tumultuous world, investors felt comfortable and confident that their investments within the US markets and in the Dollar were safe. After 9/11 that all changed. The United States had suffered a terrible attack within its sacred borders and confidence would be lost.

  3. Gold as a Safe Haven • As investors became concerned about holding the world’s reserve currency (US Dollars) as a safe haven, commodities became an alternative. And, Gold became the metal of choice.

  4. Gold trading since September 11, 2001

  5. Currency investments begin to move away from the US Dollar • As investors lost confidence in the US Dollar they began to search for alternative markets. The Euro and other higher yielding currencies began to become attractive to investors, speculators, traders and funds managers. • Traders didn’t love the other currencies they just didn’t want to hold onto US Dollars.

  6. Euro trading since September 11, 2001

  7. Seven Years of US Dollar Weakness

  8. USD begins to recover

  9. A case for a stronger USD • Weaker USD improved US competitiveness • Accelerated export revenues • Slower GDP growth reduced imports • Trade Deficit began to shrink • Current Account Deficit narrowed • Fewer USD going to foreign suppliers • Narrowing of global liquidity created support for the USD • The US is considered to be the leading force that turns the wheels of global industries. • Expected that US economy has a better chance of surviving the turmoil. • US is not the only country with problems.

  10. EUR/USD Moves Sideways

  11. EUR strengthens

  12. EUR Weakens

  13. Important terms to watch for in currency trading • Confidence • Lack of Confidence • Risk • Risk Aversion • Yield Spreads • Carry Trades • Market Positioning (Short Covering) (Short Squeeze) (Unwinding) • Support • Resistance

  14. Brazilian Real trading since September 11, 2001

  15. Australian Dollar trading since September 11, 2001

  16. Canadian Dollar trading since September 11, 2001

  17. South African Rand trading against the Japanese Yen since September 11, 2001Carry Trades

  18. Currency Exposure • Foreign Exchange Exposure – Any time an individual or corporation owns one currency and has either an obligation or receivable in another currency a Foreign Exchange Exposure is created. • For Example: • A United States importer has US Dollars and is sourcing product from Ireland and must pay for the obligation if Euro. • A United States exporter wants US Dollars and has sold their products to Japan and will be receiving payment in Yen. • U.S. multinational Company owns coal mines in Australia. . • U.S. multinational Company provides intercompany loans to their foreign subsidiaries in the UK, Spain, Canada, South Korea, Germany and Japan. • A US importer is sourcing product from Brazil and is being charged in BRL but will be paying in USD.

  19. Foreign Exchange Products • Spot – The exchange of one currency for another at a specific rate for value in two days (one day for Canadian Dollars). • Forward Contracts – The exchange of one currency for another at a specific rate for value in the future or two days + (one day + for Canadian Dollars)

  20. Foreign Exchange Products • Forward pricing is a component of two factors: • Spot • Swap Points (Based on the interest rate differential between the two countries of the currencies being exchanged.) • For Example: • 6 month Australian Dollars against US Dollars • (Spot) .90 - .0187 (187 Swap Points) = .8813 All In (Outright) Price • Australian interest rates, in this example, are higher than US interest rates and the Australian currency (AUD) is then bought and sold at a discount against the US Dollar. • Forward Contracts are used to hedge the value of Foreign Exchange Exposure created by underlying transactions for a specific date or range of dates.

  21. Foreign Exchange Products • Non Deliverable Forwards (NDFs) Are forward contracts for non liquid or restricted currencies Synthetic hedge For Example: One Year Brazilian Real against US Dollars (Spot) 1.7720 + .1600 (1600 Swap Points) = 1.9320 All In (Outright) Price Brazil’s interest rates, in this example, are higher than US interest rates At maturity, there is no delivery of currency. The contract is netted against the current spot and US Dollars are settled.

  22. Foreign Exchange Products • Non Deliverable Forwards (NDFs) In this Example: ABC Corp buys BRL 1,000,000 @ 1.9320 for USD 517,598.34 for May 2, 2011 On April 29, 2011 BRL is trading @ 1.6000 for May 2, 2011 On May 2, 2011 Sells USD 517,598.34 Buys USD 625,000 (BRL 1,000,000 @ 1.6000) ABC Corp is paid USD 107,401.66 When ABC goes to pay the BRL obligation they will be charged at a rate of 1.6000 for USD 625,000. Because they had the NDF they have USD 107,401.66 to contribute toward the purchase effectively reducing the rate to 1.9320.

  23. Foreign Exchange Products • Non Deliverable Forwards (NDFs) As with Forward contracts an NDF is a contractual obligation. Should BRL in this example go to 2.10 ABC Corp would be obligated to pay the USD difference. However, they would benefit from the better rate of 2.10 when paying their obligation. By paying the USD difference the effective hedge rate of 1.9320 would remain intact. The hedge has still accomplished what it set out to do. It locked in a guaranteed rate and eliminated currency exchange risk.

  24. Foreign Exchange Products Options – An agreement between a buyer and seller of a contract in which the buyer pays a premium to the seller for the right but not the obligation to buy or sell a currency pair or commodity at a specified strike price (rate) on a specific value date. An expiration date is established, generally, in the case of currencies, two days prior to value date (one day for Canadian Dollars) where the buyer of the option must decide whether or not to exercise (buy or sell the currency pair or commodity) on the value date at the established strike price. If the option goes unexercised there is no exchange done on the value date and the option simply expires. Call =The right to buy Put =The right to sell

  25. Foreign Exchange Products Option Example: ABC Corp has sold his product to his customer in Germany. He wants to hedge the transaction to protect his budget pricing but he believes that the EUR might strengthen. He decides to purchase a EUR Put and pay a premium to the seller to give himself the right but not the obligation to sell his EUR at a specified strike price (rate). The purchase of the option is like buying an insurance policy and he is guaranteed that he will not have to sell the EUR at a rate worse than the strike price. He is hoping that the EUR appreciates and he can walk away from the EUR Put, letting it expire worthless and sell his EUR for a higher price.

  26. Foreign Exchange Products • Option Variations – Purchasing a straight Call or Put, depending on the parameters of the transaction, can be expensive. The premiums may make the hedge unattractive. For this reason there are variations on currency options available to help alleviate some or all of the expense. Obviously the more you pay the more positive potential you can buy. But a company can buy some limited positive potential at a reduced cost. • Risk Reversals (Collars) • Barriers • Spreads • Multiple leg option structures

  27. Disclaimer IDB Bank distributes the information contained herein for general information and discussion purposes only, and such information does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with competent advisers. The Bank is not acting as your advisor, fiduciary, or agent, and is not managing your account and makes no recommendation as to the suitability of any of the products or transactions described herein. The information is provided “as is” with no assurance or guarantee of completeness, accuracy, or timeliness, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. Additionally, the contents, graphics, design, articles, announcements, banners and any other matters related to this information are protected under applicable copyrights, trademarks and other proprietary rights. The information does not necessarily reflect the opinion or views of the Bank, may change without notice, and the information does not constitute an offer or solicitation of any particular product or financial, investment or tax service. Nothing herein shall constitute a solicitation or offer by Bank to sell products or services of any kind whatsoever including, without limitation, lending and deposit products.

  28. Contact Information Patricia Lifson IDB Bank New York 511 Fifth Ave New York, NY 10017 212-551-8142 877-229-6346 (Toll Free) plifson@idbbank.com

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