Hedging is an important defensive move for your company and, if used effectively, can be a valuable offensive strategy as well. This presentation addresses how, by hedging, or actively managing your company's foreign exchange exposure to protect revenues, expenses, assets and liabilities from exchange rate volatility, you can minimize disruption to the business and improve the bottom line. Topics include: - Various types of currency risks - Why you need to manage FX risk — and when? - How to select the best strategy for your company - How to hedge internally - When to employ FX tools including spot contracts, forward contracts, over-the-counter options, structured strategies and foreign currency deposits Speakers: - Joe O'Leary - Senior Foreign Exchange Trader, Silicon Valley Bank - Ed Sauve - Senior Advisor, Global Financial Services, Silicon Valley Bank

1. Avoiding Risky Business:
FX Hedging Best Practices
Ed Sauve & Joe O’Leary
May 26, 2011

2. Today’s Speakers
• Ed Sauve, Senior Foreign Exchange Advisor, Silicon
Valley Bank
• Joe O’Leary, Senior Foreign Exchange Trader,
Silicon Valley Bank
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3. Topics for Today
• Globalization, Foreign Exchange and Your Company
• Perceptions and Reality
• Best Practices
• Common Hedging Instruments
• Regulatory Update
• Q&A
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4. Globalization, Foreign Exchange
and Your Company
Ed Sauve
Senior Foreign Exchange Advisor,
Silicon Valley Bank
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5. Global Expansion
Foreign exchange-Foreign currency impact unavoidable
• Impact even if all business is conducted in USD
• Rate of exchange between two currencies is not fixed
• Volatility of exchange rates: 5/4/11 - $1.4827 = EUR 1.0000
5/6/11 - $1.4316 = EUR 1.0000
=3.5% value change in 2 day
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6. Foreign Exchange Market
• Massive: Dwarfs all exchanges
• Global
• 24x7
• Unregulated freely floating currencies
• Volatility
• Not uniform (e.g. restricted)
• Wholesale market & market makers vs. small bus./retail
• Bid-ask quotes based on spot market e.g. bid $1.4750; Ask
$1.4755 to purchase 1 euro (EUR). 2 day settlement
• Duality-currency pairs (EUR/USD; USD/JPY)
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7. Foreign Exchange and the Enterprise
Treasury operations
• Pay overseas vendors and/or employees
• Invest capital & fund foreign operations
• Channel sales proceeds (A/R) denominated in foreign
currencies
• Receive dividends, funded debt, & return capital
denominated in foreign currency
Strategic transactions
Reliable and timely execution is critical
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8. Foreign Exchange Risk
• Foreign exchange rates fluctuate continuously –volatility
• FX gains or losses unless every current and future FX
exposure is perfectly offset in terms of amount and
settlement date
• Key factors = Amount, direction & maturity/settlement
• Types of risk:
o Transaction-Exposure based on identified funds flow such as
foreign currency receipts or payments
o Translation-Exposure from foreign currency denominated assets,
liabilities, and capital
o Economic-Long term Impact of exchange volatility e.g. pricing in
USD versus competition in local currency
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9. Foreign Currency Cash Flow #1 and
Related Foreign Currency Exposure
EUR 1,500,000
Sold on 60 day
terms. P.O.
received 30 days
before shipment
Medical Device One Time Large
Systems Company Order from
Selling to USA Regional Hospital
customer base Group in Europe
EUR 1,500,000
Sales Proceeds
due 60 days after
invoice
Upon receipt of firm Purchase Order the
Med Device Company is “long” EUR for
90 days and is “exposed” to the risk of
fluctuations reducing USD proceeds on
the day the buyer pays the EUR 1.5
million.
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10. Foreign Currency Cash Flows #2
Clinical Trials in
EUR Germany
100,000/
Month
EUR
Early Stage Life 25,000/ Pre-Clinical Trials
Science Company Month in France
Pre-Revenue
Well Funded &
GBP
Product(s) in 35,000/Month
Development
Research expense
At Current Rates Company can be said in UK
to be:
•“Short” EUR 125,000 per month = to
$180,000 or $2.16 million for the year at
$1.44 = EUR 1.00
•Also “short” GBP 35K/month = to
$57,050 or $684,600 for the year
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11. Foreign Currency Cash Flows #3
European
Distributor
EUR (On continent)
125,000/
Growing Month
Electronics
Company Large Japanese
US Dollar Expense JPY 75 Corporate
Mio/ Month Customer
Base
But Overseas
Demand and need GBP
to Sell in Local 50,000/Month UK Sales
Currencies
Subsidiary
At Current Rates Company is:
•“Long” EUR 125,000 per month = to
$180,000 or $2.16 million for the year at
$1.44 = EUR 1.00
•Also “Long” JPY 75 million per month =
to $937,500/Mo or $11,250,000
•Also “short” GBP 35K/month = to
$57,050 or $684,600 for the year
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12. Foreign Currency Cash Flows #4 (and it
can get even more complicated)
Dutch Based Customers in
Exp =EUR
125,000/ month
European HQ and Germany
Sales subsidiary
EUR EUR Sales =2,000,000
Exp Customers in
per month
CAD 100,000 France
Major Software per month Canadian
Company with Customers in
Customers
Extensive Italy
Overseas Sales
UK Sales Branch
GBP Exp= Sales = GBP 450K Customers in
50,000/Month Spain
per month
•Net Long EUR 1.875 million/month GBP
Exp
•Also Net “Long” GBP 400K/Month
JPY Exp=
Japan Branch Customers in
•But Net short JPY 45 million/month even
125MM/Month Sales= JPY 80MM Sweden
with JPY Revenue per Month
JPY
•Long CAD 100K/Month Exp
•Latin America Sales in USD Sales to Customers in
Customers in Latin Eastern
America Europe
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13. Hedging Strategies
Joe O’Leary
Senior Foreign Exchange Trader,
Silicon Valley Bank
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14. Definition of Foreign Exchange Hedging
• “We use financial instruments to mitigate exposure”
• “Entails giving up some opportunity / gains to reduce risk”
• “Protects my revenue”
• “Foreign exchange hedging is a financial strategy used to protect
my business against volatility in world currency markets”
• Important to have “cash flow predictability”
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15. Market Forecasts vs. Reality
■ Predicted ■ Actual
Source: Reuters
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16. Risk Curve Analysis – Standard Deviation
EUR/USD
1.55
EUR/USD
1.55
1.5
1.5
1.45
1.45
1.4 1.4
Probability
1.35 1.35
1.3
1.3
1.25
1.25
1.2
1.2
Source: Bloomberg
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17. Common Misconceptions
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18. Misconception: Hedging is a Form of Speculation
Reality
• Not hedging is actually a form of speculation
• Hedging is another risk management strategy
• Look at competition
• Over-hedging could be speculating
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19. Misconception: Foreign Exchange Movements
Even Out Over Time
Reality
• What is your time horizon?
Source: Bloomberg
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20. Misconception: A Company is Immune to
Foreign Currency Dynamics
Reality
• Pricing and reporting in USD does not mitigate currency risk
• Company size does not matter
• Both private and public companies can benefit from FX hedging
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21. Misconception: Too Time Consuming
• Average time spent on the programs was 3 hours a month
• 4 hours at quarter end
• Most time consuming process was gathering cash forecasts
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22. Getting Started
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23. When to Consider FX Hedging
• Selling overseas
• Buying from overseas suppliers
• Setting up manufacturing facilities overseas
• Outsourcing R&D or customer support
• Overseas acquisitions
• Balance sheet revaluations
• Competing with overseas competitors
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24. Getting Started
ANALYSIS DEVELOP FX POLICY CHOOSE STRATEGY MONITOR EVENTS
AND EXECUTE AND RESULTS
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25. Analysis
Data collection to identify global exposure
• Forecasted sales, purchases, profits, dividends
• Firm commitments – sales or purchases not yet booked
• Transactions booked – A/R, A/P
• Inter-company transactions / transfers
• Short and long term investments
Exposure Analysis
• Quantify exposure to determine financial impact
• Compare quantified risk with cost of hedging
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26. Strategic Approach to Risk
HIGH
Fully Hedged
PROBABILITY
Partially Hedged
No Hedge: Actively Tracked
No Hedge: Reviewed Regularly
LOW $ IMPACT HIGH
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27. Develop a Foreign Exchange Policy
FX Policy
• A framework approved by the board
that incorporates all aspects of FX risk
management
o Reflect corporate goals and objectives
o Buy-in from management
o Ensure commitment of resources
o Consistency in FX activities
o Accounting issues
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28. Develop a Foreign Exchange Policy – cont.
Policy Components
• Objectives
• Risk tolerance-Passive? Active?
• Hedging strategies
• Accountability/oversight
• 100% of corporations that hedge have an FX policy
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29. Choosing the Right Strategy and Executing
Common Hedging Instruments
• Natural offset- Currency accounts
• Forward contracts
• Over-the-counter options
• Structured option strategies
Work with your accounting and senior management to ensure your
selected instruments are appropriate for your company. Are they in
your FX policy?
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30. Monitor Events and Results
• Ensure exposures are being hedged as planned
• Develop regular reports to evaluate success of hedges in meeting goals
o Mark-to-market report
o Exposure report
• Be alert to events or FX rate changes that may affect your business
• Identify/learn new hedging tools
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31. Common Hedging Practices
Association of Corporate Treasurers
• 90% centralized hedge management
• 80% hedge cash forecasts (AP, payroll, AR, cash balances)
• 80% Net FX assets and liabilities
• 80% hedge to minimize risk (transactions and earnings)

32. Common Hedging Strategies
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33. Natural Offset
• Easier and less time consuming
• Utilizing non- USD accounts to collect and pay in same currency
• Allows for cross currency trades to help mitigate risk. Higher
correlation (AUD,GBP, EUR, CAD)
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34. “No Free Lunch”
Flexibility/Upfront costs
Least Most
Forwards Options
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35. Forwards/Window Forward
• Contractual agreement that your foreign currency payment or collection,
scheduled to take place on a particular date in the future, will be
converted at a fixed date and fixed exchange rate regardless of market
fluctuations.
• No upfront costs
• Protect against currency depreciation/appreciation
• However, NO benefit, should the currency move in your favor
• Window forward - adds more flexibility only the timing. The value
date is not a fixed date but a window of time. Great for A/R.
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36. Forward Contract- Example
EUR 1,500,000
Sold on 60 day
terms. PO received
30 days before
shipment
Medical Device One Time Large
Systems Company Order from
Selling to USA Regional Hospital
customer base Group in Europe
EUR 1,500,000
Sales Proceeds
Upon receipt of firm Purchase Order the Med Device due 60 days after
Company is “long” EUR for 90 days and is “exposed” to the invoice
risk of fluctuations reducing USD proceeds on the day the
buyer pays the EUR 1.5 million
• SVB buys your 1.5 Mio. EUR at 1.4255(1.4285-.0030), Value 8/31/11
• Window: SVB buys 1.5M EUR at 1.4250(1.4285-.0035), Value 8/15/11
to 9/15/11
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37. Plain Option
• An Option gives the buyer the right, but not the obligation
to fulfill the option at maturity
• The premium is the cost paid by the buyer of the option
• The strike price is the rate at which the option is valued
• An “insurance policy”
• Regulatory concerns
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38. Option Example
EUR 1,500,000
Sold on 60 day
terms. PO received
30 days before
shipment
Medical Device One Time Large
Systems Company Order from
Selling to USA Regional Hospital
customer base Group in Europe
EUR 1,500,000
Sales Proceeds
Upon receipt of firm Purchase Order the Med Device
Company is “long” EUR for 90 days and is “exposed” to the due 60 days after
risk of fluctuations reducing USD proceeds on the day the invoice
buyer pays the EUR 1.5 million
• Buy a EUR put, strike at 1.4255, maturity 8/31/11
• Premium is 2.5%
•At maturity, if EUR >1.4255 = don’t execute option
•At maturity, if EUR < 1.4255= execute and sell at 1.4255
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39. Financial Reform Update – Issued May 2012
• Treasury Notice of “Proposed Determination on Foreign Exchange Forwards and
Swaps”
• Background: Dodd Frank Act Financial Reform federal initiatives to further control use
of financial derivatives
• Widespread effort to exclude foreign exchange instruments
• Treasury Notice exempted FX Forwards and Swaps from the new restrictions and
limits on financial derivatives to be applied to interest rate and other derivative
financial instruments
• However FX options and hybrids and non-deliverable forward contracts were not
protected from the new provisions which could include:
o Cash margins
o Move trading to an exchange
o Increased financial reporting
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40. Questions?
40

41. Contacts
41

42. Ed Sauve
Ed Sauve is the senior advisor for the Global Financial Services Group
of Silicon Valley Bank and he has 20 plus years of commercial banking
experience including provision of credit and delivery of a wide variety of
financial services to small business, middle market, institutional and
multi-national companies.
Sauve's international banking experience includes assignments in
London, Middle East and Hong Kong. He opened Middle East Area
Representative office for First Interstate Bank in the United Arab
Ed Sauve Emirates and led a program to obtain license to open its bank office in
Senior Foreign Exchange Advisor Beijing, China. Currently he supports the international activities of SVB's
esauve@svb.com
Southern California-based clients.
949.754.0816
His domestic experience includes management of regional corporate
centers in Los Angeles and the South Bay for Wells Fargo/First
Interstate, as well as regional responsibility for marketing Silicon Valley
Bank's short-term money market capabilities in Southern California. He
has transaction experience in commercial lending, cash management,
corporate finance, short-term money market investments and
international banking.
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43. Joe O’Leary
Joe O'Leary has over 14 years of experience working in the financial services
industry. As a seasoned foreign exchange professional his knowledge extends from
consultative marketing in foreign exchange principals, extensive knowledge of
currency risk management and experience in gathering, evaluating, and hedging
foreign exchange exposures for multinational corporations. His duties have included
offshore interest rate products, asset liability management, foreign exchange trading
and corporate foreign exchange risk management.
O'Leary joined SVB in May of 2006 as a foreign exchange advisor. Currently in his
capacity as senior foreign exchange trader, he prepares custom hedging strategies
for clients with complex currency-related issues, advises clients in developing,
implementing, and monitoring foreign exchange strategies and educates clients in
Joe O’Leary
understanding foreign exchange products. In addition, O'Leary manages SVB's non-
Senior Foreign Exchange Trader USD loan portfolio and mitigates the banks FX exposure.
joleary@svb.com
408.654.1017
Prior to joining SVB, O'Leary was a treasury manager at a large hard disk drive
manufacturer based in, California, where he managed the corporation's foreign
exchange exposure. Additionally, O'Leary worked with overseas offices on cash
forecasting, standby letters of credit and general ledger accounts. O'Leary began his
career at the Bank of Hawaii (BOH) where he held various positions within the
bank's treasury department.
O'Leary holds a bachelor's degree in International Business from the University of
Hawaii, Honolulu. He also holds a certificate on foreign exchange principles from the
World Trade Institute in New York, New York, and O'Leary is a member of the
Association for Financial Professionals.
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44. Advisors
West West Central East
Dave Bhagat Mary Jo Mack Matt Wysong Carla Winfield
Senior FX Advisor Senior FX Advisor Trade Finance Advisor Senior Trade Finance Advisor
415.806.5341 303.378.7024
650.320.1158 617.630.4154
mjmack@svb.com mwysong@svb.com
dbhagat@svb.com cwinfield@svb.com
Todd Brothers Laurence Hayward
Dennis Brown Senior FX Advisor Senior FX Advisor Drew Devine
Senior Trade Finance Advisor 415.764.3153 FX Advisor
tbrothers@svb.com 972.455.0961
949.754.0838 617.630.4145
lhayward@svb.com
dbrown@svb.com ddevine@svb.com
Ed Sauve Paul Jennings
Senior FX Advisor
Senior FX Advisor
617.796.6934
949.754.0816
pjennings@svb.com
esauve@svb.com
Scott Petruska
Joe O’Leary Senior FX Advisor
Senior FX Trader 617.796.6930
408.654.1017 spetruska@svb.com
joleary@svb.com
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45. SVB’s Foreign Exchange Desk
Toll Free: 888.313.4029
FXTraders@svb.com
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46. Disclosures
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.
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