1. 1 Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference Supply Chain – Management Practices for Currency

2. 2 Dealing in foreign currencies offers rewards and risks Treasury risk management has to be seen within an integrated risk framework Reference: “CFO – Architect of the Corporation’s Future”, John Wiley & Sons, 1997 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference

3. 3 Business risk is a matter of perspective.  Finance, operational managers, institutional investors, all see risk differently.

4. 4 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference Business risk arises from the likelihood that something good won’t happen, as well as the threat that something bad will happen.

5. 5 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference The population of risks can be divided into 5 (five) main groups:  StrategicRisks of plans fail  Financial  OperationalRisks of human errors or omission  CommercialRisks of business interruption  TechnicalRisks of physical assets failure

6. 6 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference Risks of financial controls fail  Treasury risks  Lack of counterparty / credit assessment  Sophisticated fraud  Systems failure  Poor inventory/receivables reconciliation Financial Risk

7. 7 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference All types of risk affect the strategic direction and ultimately the company’s ability to generate shareholder value. In the past – risk might have been the insurance manager’s responsibility.  Financial control mattes are the treasurer’s responsibility.  Consumer relations might have been the sales and marketing responsibility.

8. 8 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference Today functionally segregating risk management is out-dated! An integrated view of business risks and risk management is required.

9. 9 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference What is the reason for such a change? 1) More and more people study business performance Banks, investors, consumers demand more evidence how the company plans to maintain a strong balance sheet.

10. 10 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference 2) Competitive pressures escalate Economic use of limited resources requires the company to lower its exposure of risks, which it is not in the business to take.

11. 11 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference 3) Risk management can create new advantages The investment community may favor a stock, if it understands the rationale underlying the total risk management effort.

12. 12 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference 4) Individual loss or gain can match business loss or gain. Senior executives with successful risk taking enjoy better career prospects.

13. 13 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference 5) Corporate fortune can reverse overnight. News hits the stock market, a company’s position can flip- flop instantaneously.

14. 14 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference 6) Global regulations grow more complex Corporations have the obligation to disclose to shareholders which risks they are in business to take, and what they are doing to manage them.

15. 15 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference Risk management means dealing with uncertainty.  What can go wrong, or fail to go right?  How often?  What counter-measures exist, or could be installed?  How likely are they to be effective?  What about risks we don’t know?  Awareness of what risks might arise, where and crucially, how material they are to the company.

16. 16 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference Focus on materiality, not source Risk management requires an integrated approach  Elimination of risks, eliminates opportunity for profits  Greater risks bring greater returns

17. 17 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference Corporate management decides on risk appetite.  Is the risk consistent with the company’s current philosophy?  With its history of gains and losses?  With investor’s understanding of how much is at risk?  With management’s skills and experience?  With the business’s cash flow, debt position, balance sheet strength – and so on?

18. 18 Foreign currency risk as part of risk management  Foreign currency-a currency other than the functional currency of the business.  Foreign currency transactions require settlement in a currency other than the functional currency.  An exchange gain or loss occurs when the exchange rate changes between the purchase date and the sale date. Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference

19. 19 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference How can you avoid/manage foreign exchange gains/losses?  Foreign exchange exposure occurs through Economic exposure Transaction exposure Translation exposure

20. 20 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference Foreign exchange gain and loss can be managed. 1) Through avoidance customer’s may not like it 2) Leading and Lagging 3) Netting Bilateral Multilateral

21. 21 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference 4) Re-invoicing using a central office, which takes over foreign exchange exposure. 5) Hedging By forward contracts By purchase of futures By purchase of options By engaging swap contracts

22. 22 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference Examples of foreign currency management  By compensating business arrangements BMW buys parts in the US for Europe BMW manufactures cars in the US Siemens’ management of exports and imports

23. 23 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference  By hedging Mercedes Benz Porsche VW

24. 24 Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference Strategic approach to currency management  Centralize foreign exchange/ finance activities around the world to better realize exposures and fully integrate treasury operations with underlying business process systems. Thank you for your attention.