HSBC Bank USA, N.A.Trade and Supply Chain

Trade & Supply Chain

Foreign Exchange and Risk Management

May 2010

Major Risks Related to International Trade

Political Risk– War, civil disturbance, or revolution

– Expropriation

– Inconvertibility of local currency into dollars or other hard currency. (Transfer Risk)

Commercial Risk/Business Risk– Disputes between buyer and seller.

– Controlling title to goods pending payment.

– Customer illiquidity or insolvency

– Inability to finance company “investment” in export accounts receivable

– Control of quality of goods.

– Working capital tied up

– Increasing reliance on bank debt.

Documentary Risk

Interest Rate Risk

Foreign Exchange Risk– Foreign Exchange Risk noted as biggest barrier to trade growth over the next six months

by U.S. businesses, according to recent Trade Confidence Index

3

Foreign Exchange Market

In today’s global market place, foreign exchange plays a significant role: 4 trillion U.S. dollars worth of currency is exchanged on a daily basis.

– -Payments

– -Investments cross-border

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, global presence, extensive footprint and local knowledge are characteristics to look for in your trade bank.

4

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

5

Why Use Foreign Exchange?

Competitive edge

– Exporters enhance their customer base by allowing customers to pay in their local currency.

Improve profit margin

– Build hedging cost into 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.

6

How is Foreign Exchange Used?

Use forward pricing to negotiate sales contracts

Lock in forward pricing when sales contract is firm

Match foreign exchange product to your particular trade cycle and predicted cash flows

7

Identifying Foreign Exchange Exposure

A clear understanding of your foreign exchange exposure is necessary to assess risks. Exposures arise as a result of exchange rate volatility.

Understanding Foreign Exchange Exposures

EUR/USD

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

USD/BRL

1.50

2.00

2.50

3.00

3.50

4.00

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

Identifying Foreign Exchange Exposure

The main sources of foreign exchange exposure:– Paying 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 manifest itself in a number of different ways: – decreased USD cash flows or margins,

– EPS or balance sheet volatility,

– overseas contract cancellations,

9

Developing a Strategy for Hedging & Risk Management

Understanding 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..

There are four risk management alternatives available:

– Spot Transaction.

– Forward Transaction

– Purchasing Vanilla Options

– Structured Products (ex. Collars, Participating Forward, etc.)

Developing a Strategy for Hedging & Risk Management

Importance of an F/X policy– Philosophy and process for managing cross-border exposure

Cornerstones– Cash management/online banking platform

– A view into F/X exposure

– Trade/Supply Chain techniques

– Manage payment risk

– Foreign exchange policy

– Manage exposure

When to consider using foreign exchange techniques– Frequency of foreign exchange trades/year

– 10-15/year

– Trade size – min. US$ 20,000 per transaction

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What is the Bottom Line?

Hedging can eliminate 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 can protect profits margins and eliminate uncertainty of the value of cash flows.

A company can 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.

12

HSBC Foreign Exchange

FX business operates out of our three main centers (New York, London and Hong Kong)

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

Note: * Not exhaustive lists

New York

Canada

Brazil

Argentina

Mexico

Chile

Bermuda

The Americas *

London

France

Germany

Russia

Turkey

Israel

Dubai

Saudi Arabia

South Africa

Europe *

Hong Kong

Japan

Australia

China

Thailand

India

Korea

Singapore

Asia *

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

3rd for qualitative criteria.

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

EM Research and strategy

Most Innovative Hedging Strategy

Fwds: EM currencies, and both over and under 1yr

Research and Analytics on online platforms

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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. 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.