fx project_baramundi cycling company_final version_presentation day
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FX ProjectBarramundi Cycling Company
Victor, Timothy, Monique, CynthiaSan Ramon, CA | 08/12/2016
Situation/Challenge
3
Case Debrief
• Barramundi Cycling Company – Location: Berkeley, CA
– CEO: Adam Munguia
• Conditions– Ensure 25% profit margin
– Provide Inventory for 10 Northern California stores
– 50% of payment due now
– Remaining 50% of payment due 60 days after delivery (October 1st)
• Service needed– Foreign Exchange Advice between AUD/USD
– Hedge the risk for import payments
Mitigating Counterparty Risk
Indirect Guarantee
Direct Guarantee
Comparison
Factors Indirect Guarantee Direct Guarantee
Costs & Fees
• More expensive• Fees would be charged
by BOW to client, taxes
• Less expensive• No fees, no cost charged
to client from BOW
Importer’s Risk
• More protection due to guarantee received from U.S. bank for the importer
• Risk is situational, depends on stability of foreign bank
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Direct Guarantees
• Applicable to first 50% payment • Ensures the buyer receives a refund if supplier fails to
deliver goods (bikes) to buyer
Advance Payment
Guarantee
• Applicable to remaining 50% payment • Ensures buyer receives a refund if the delivered goods do
not meet certain performance expectations• Valid until 6 months after delivery date• Recourse on faulty product or incorrect shipped inventory
Performance Guarantee
Currency Hedging
10
Currency Hedging
Why Currency Hedging is important
• Increase certainty when determining returns of investment by mitigating the risk from fluctuating rate changes
How It Works
• Forward Contract• Allows purchaser to lock in an exchange rate to buy currency at future exercise date • Most cost efficient and conservative way to hedge • Simple and straightforward• Low transaction cost
Recommendations
• Forward Contract• Paying with AUD to maximize cost efficiency
Payment
12
Revolver
• A revolver is a line of credit that allows customer to use funds when needed. Balance is carried from month to month.
• Example: Spend $1000, repay $300 and carry over to the next month a
balance of $700 plus interest. Next month spend $1000, repay $400, carry over to the next month a balance of $1,300 plus interest.
• Bank of the West Revolver Product:– Available up to $20,000,000
– Interest: 2% rate annually continuous compounded
13
June 2nd
July
August
September 1st
October 3th
November 1st
December 1st
Note:• The rate has taken into account the bank fee• Details see the appendix
Pay required 50% of total payment with the spot
rate of 0.723 on 6/2/2016
Pay remaining 50% of total payment
Payment Scheme Option 1
Exercise date 09/01/2016 10/03/2016 11/01/2016 12/01/2016Forward Period 3M 4M 5M 6MForward Rate 0.718732 0.720089 0.719442 0.718814
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June 2nd
July
August
September 1st
October 3th
November 1st
December 1st
Note:• The rate has taken into account the bank fee• Details see the appendix
Pay required 50% of total payment with the spot
rate of 0.723 on 6/2/2016
Pay 12.5% of total payment
Pay remaining 37.5% of total payment
Payment Scheme Option 2
Exercise date 09/01/2016 10/03/2016 11/01/2016 12/01/2016Forward Period 3M 4M 5M 6MForward Rate 0.718732 0.720089 0.719442 0.718814
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Total Cost
• Option 1 offers total cost of $12,133,131;• Option 2 offers total cost of $12,133,302, with a difference of $172
Exercise date 09/01/2016 10/03/2016 11/01/2016 12/01/2016Forward Period 3M 4M 5M 6MForward Rate 0.718732 0.720089 0.719442 0.718814
Inputs Date Market rate Bank Fee Actual Payment RateUSD/AUD 06/02/2016 0.723 35 bps 0.7265
Date Amount Total CostOption 1 06/02/2016 USD 6,084,437.50
12/01/2016 USD 6,048,693 12,133,131$
Option 2 06/02/2016 USD 6,084,437.5009/01/2016 USD 1,512,34512/01/2016 USD 4,536,520 12,133,302$
Difference 172$
Why Payments on a Later Date Saves More Money
16
AUDUSD Historical Correlation with 1) U.S. economy presented by S&P 500 Index, U.S. Unemployment rate 2) Other major currencies (EURUSD)
US Unemployment
S&P 500
AUDUSD Moving Weighted Average
EURO Currency Trust
AUDUSD Historical Monthly Closed Rates (As of June 2nd, 2016)
Recommendation
18
Recommendation
• Use Forward Contract• Taking into account all risk factors and their potential impact on your business, we
recommend Payment Scheme Option 1 because it minimizes client’s credit and total payment exposures, especially when client hasn’t generated sales
• Direct Guarantees:– Advanced Payment Guarantee
– Performance Guarantee
June 2nd
July
August
September 1st
October 3th
November 1st
December 1st
Pay required 50% of total payment with spot rate of 0.723
on 6/2/2016
Pay remaining 50% of total payment at the
rate of 0.718814
Exercise date 09/01/2016 10/03/2016 11/01/2016 12/01/2016Forward Period 3M 4M 5M 6MForward Rate 0.718732 0.720089 0.719442 0.718814
19
Pricing
• Target: 25% Profit Margin
• Cost per bike unit takes into account the best payment scheme (Option 1)– With a total payment of USD12,133,131
• The gross profit margin aligns with the average margin sales on bikes among U.S. bike dealers from the National Bicycle Dealers Association (NBDA)
• Total cost includes operating costs, depreciation and amortization and tax (10% of taxable income)
• Estimated profit margin for each type of bicycle roughly exceeds the 25% target
per unit R100 R200 R500 R1000Revenues/ sales price 949.00$ 1,549.00$ 2,749.00$ 9,049.00$ COGS/ Cost per unit 542$ 903$ 1,625$ 5,417$
Gross Profits 407.33$ 646.21$ 1,123.98$ 3,632.26$ Gross Profits Margin 43% 42% 41% 40%
Total Cost (Inc. Tax) 140.42$ 210.55$ 350.82$ 1,087.23$ Profit 266.91$ 435.66$ 773.16$ 2,545.03$ Profit Margin 28% 28% 28% 28%
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Resources/References Used
Online Sources Investopedia http://www.investopedia.com/terms/c/currencyforward.asp XE http://www.xe.com/currency/aud-australian-dollar Dailyfx https://www.dailyfx.com/aud-usd Yelp https://www.yelp.com City of Berkeley http://berkeley.cityapplications.com National Bicycle Dealers Association http://nbda.com/
External Sources Adam Munguia Aditya Prakash Andres Bergero Ian Broff (SF office) Ritwik Roy
Q&A
21
Appendix
22
23
Appendix
Assumptions:
First 50% Payment:
Minimum balance Oustanding 6,154,322.01$ USDSpot Rate 0.72270 USD/AUDTraded rate 0.72300 USD/AUDDate 06/02/2016
Assuming the client would schedule to pay off all the loan payment by December 31st
24
Appendix0M 6M 5M 4M 3M
0.7265 0.722232 0.723589 0.722942 0.7223141 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,141,654$ 1 Second 12.50% -$ 1,512,173$ -$ -$ -$ 1 Third 37.50% -$ -$ 4,545,043$ -$ -$ 2 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,137,590$ 2 Second 12.50% -$ 1,512,173$ -$ -$ -$ 2 Third 37.50% -$ -$ -$ 4,540,979$ -$ 3 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,133,646$ 3 Second 12.50% -$ 1,512,173$ -$ -$ -$ 3 Third 37.50% -$ -$ -$ -$ 4,537,035$ 4 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,135,972$ 4 Second 12.50% -$ -$ 1,515,014$ -$ -$ 4 Third 37.50% -$ 4,536,520$ -$ -$ -$ 5 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,140,431$ 5 Second 12.50% -$ -$ 1,515,014$ -$ -$ 5 Third 37.50% -$ -$ -$ 4,540,979$ -$ 6 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,136,487$ 6 Second 12.50% -$ -$ 1,515,014$ -$ -$ 6 Third 37.50% -$ -$ -$ -$ 4,537,035$ 7 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,134,617$ 7 Second 12.50% -$ -$ -$ 1,513,660$ -$ 7 Third 37.50% -$ 4,536,520$ -$ -$ -$ 8 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,143,141$ 8 Second 12.50% -$ -$ -$ 1,513,660$ -$ 8 Third 37.50% -$ -$ 4,545,043$ -$ -$ 9 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,135,132$ 9 Second 12.50% -$ -$ -$ 1,513,660$ -$ 9 Third 37.50% -$ -$ -$ -$ 4,537,035$ 10 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,133,302$ 10 Second 12.50% -$ -$ -$ -$ 1,512,345$ 10 Third 37.50% -$ 4,536,520$ -$ -$ -$ 11 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,141,826$ 11 Second 12.50% -$ -$ -$ -$ 1,512,345$ 11 Third 37.50% -$ -$ 4,545,043$ -$ -$ 12 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,137,762$ 12 Second 12.50% -$ -$ -$ -$ 1,512,345$ 12 Third 37.50% -$ -$ -$ 4,540,979$ -$ 13 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,138,813$ 13 Second 25% -$ 3,024,347$ -$ -$ -$ 13 Third 25% -$ -$ 3,030,029$ -$ -$ 14 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,136,104$ 14 Second 25% -$ 3,024,347$ -$ -$ -$ 14 Third 25% -$ -$ -$ 3,027,320$ -$ 15 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,133,474$ 15 Second 25% -$ 3,024,347$ -$ -$ -$ 15 Third 25% -$ -$ -$ -$ 3,024,690$ 16 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,138,813$ 16 Second 25% -$ -$ 3,030,029$ -$ -$ 16 Third 25% -$ 3,024,347$ -$ -$ -$ 17 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,141,786$ 17 Second 25% -$ -$ 3,030,029$ -$ -$ 17 Third 25% -$ -$ -$ 3,027,320$ -$ 18 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,139,156$ 18 Second 25% -$ -$ 3,030,029$ -$ -$ 18 Third 25% -$ -$ -$ -$ 3,024,690$ 19 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,136,104$ 19 Second 25% -$ -$ -$ 3,027,320$ -$ 19 Third 25% -$ 3,024,347$ -$ -$ -$ 20 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,141,786$ 20 Second 25% -$ -$ -$ 3,027,320$ -$ 20 Third 25% -$ -$ 3,030,029$ -$ -$ 21 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,136,447$ 21 Second 25% -$ -$ -$ 3,027,320$ -$ 21 Third 25% -$ -$ -$ -$ 3,024,690$ 22 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,133,474$ 22 Second 25% -$ -$ -$ -$ 3,024,690$ 22 Third 25% -$ 3,024,347$ -$ -$ -$ 23 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,139,156$ 23 Second 25% -$ -$ -$ -$ 3,024,690$ 23 Third 25% -$ -$ 3,030,029$ -$ -$ 24 First payment 50% 6,084,438$ -$ -$ -$ -$ 12,136,447$ 24 Second 25% -$ -$ -$ -$ 3,024,690$ 24 Third 25% -$ -$ -$ 3,027,320$ -$ 25 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,151,003$ 25 Second 25% -$ 3,024,347$ -$ -$ -$ 25 Third 0 -$ -$ -$ -$ -$
TotalT PaymentPayment Scheme
PaymentSpot/Forward rates
25
Appendix0M 6M 5M 4M 3M
0.7265 0.0035 0.0035 0.0035 0.003526 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,156,685$ 26 Second 25% -$ -$ 3,030,029$ -$ -$ 26 Third 0% -$ -$ -$ -$ -$ 27 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,153,976$ 27 Second 25% -$ -$ -$ 3,027,320$ -$ 27 Third 0% -$ -$ -$ -$ -$ 28 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,151,346$ 28 Second 25% -$ -$ -$ -$ 3,024,690$ 28 Third 0% -$ -$ -$ -$ -$ 29 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,153,844$ 29 Second 12.50% -$ 1,512,173$ -$ -$ -$ 29 Third 12.50% -$ -$ 1,515,014$ -$ -$ 30 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,152,489$ 30 Second 12.50% -$ 1,512,173$ -$ -$ -$ 30 Third 12.50% -$ -$ -$ 1,513,660$ -$ 31 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,151,174$ 31 Second 12.50% -$ 1,512,173$ -$ -$ -$ 31 Third 12.50% -$ -$ -$ -$ 1,512,345$ 32 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,153,844$ 32 Second 12.50% -$ -$ 1,515,014$ -$ -$ 32 Third 12.50% -$ 1,512,173$ -$ -$ -$ 33 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,155,331$ 33 Second 12.50% -$ -$ 1,515,014$ -$ -$ 33 Third 12.50% -$ -$ -$ 1,513,660$ -$ 34 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,154,016$ 34 Second 12.50% -$ -$ 1,515,014$ -$ -$ 34 Third 12.50% -$ -$ -$ -$ 1,512,345$ 35 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,152,489$ 35 Second 12.50% -$ -$ -$ 1,513,660$ -$ 35 Third 12.50% -$ 1,512,173$ -$ -$ -$ 36 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,155,331$ 36 Second 12.50% -$ -$ -$ 1,513,660$ -$ 36 Third 12.50% -$ -$ 1,515,014$ -$ -$ 37 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,152,661$ 37 Second 12.50% -$ -$ -$ 1,513,660$ -$ 37 Third 12.50% -$ -$ -$ -$ 1,512,345$ 38 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,151,174$ 38 Second 12.50% -$ -$ -$ -$ 1,512,345$ 38 Third 12.50% -$ 1,512,173$ -$ -$ -$ 39 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,154,016$ 39 Second 12.50% -$ -$ -$ -$ 1,512,345$ 39 Third 12.50% -$ -$ 1,515,014$ -$ -$ 40 First payment 75% 9,126,656$ -$ -$ -$ -$ 12,152,661$ 40 Second 12.50% -$ -$ -$ -$ 1,512,345$ 40 Third 12.50% -$ -$ -$ 1,513,660$ -$ 41 First payment 100% 12,168,875.00$ -$ -$ -$ -$ 12,168,875$ 41 Second 0 -$ -$ -$ -$ -$ 41 Third 0 -$ -$ -$ -$ -$ 42 First payment 87.5% 10,647,766$ -$ -$ -$ -$ 12,159,939$ 42 Second 12.5% -$ 1,512,173$ -$ -$ -$ 42 Third 0.0% -$ -$ -$ -$ -$ 43 First payment 87.5% 10,647,766$ -$ -$ -$ -$ 12,162,780$ 43 Second 12.5% -$ -$ 1,515,014$ -$ -$ 43 Third 0.0% -$ -$ -$ -$ -$ 44 First payment 87.5% 10,647,766$ -$ -$ -$ -$ 12,161,425$ 44 Second 12.5% -$ -$ -$ 1,513,660$ -$ 44 Third 0.0% -$ -$ -$ -$ -$ 45 First payment 87.5% 10,647,766$ -$ -$ -$ -$ 12,160,111$ 45 Second 12.5% -$ -$ -$ -$ 1,512,345$ 45 Third 0.0% -$ -$ -$ -$ -$ 46 First payment 50.0% 6,084,438$ -$ -$ -$ -$ 12,133,131$ 46 Second 50.0% -$ 6,048,693$ -$ -$ -$ 46 Third 0.0% -$ -$ -$ -$ -$ 47 First payment 50.0% 6,084,438$ -$ -$ -$ -$ 12,144,495$ 47 Second 50.0% -$ -$ 6,060,058$ -$ -$ 47 Third 0.0% -$ -$ -$ -$ -$ 48 First payment 50.0% 6,084,438$ -$ -$ -$ -$ 12,139,077$ 48 Second 50.0% -$ -$ -$ 6,054,639$ -$ 48 Third 0.0% -$ -$ -$ -$ -$ 49 First payment 50.0% 6,084,438$ -$ -$ -$ -$ 12,133,817$ 49 Second 50.0% -$ -$ -$ -$ 6,049,380$ 49 Third 0.0% -$ -$ -$ -$ -$
Payment Scheme
T Payment Spot/Forward ratesPayment
Total
26
Appendix
Payment SchemePrice Tag Starting Date Spot Rate Actual Payment RateAUD 16,750,000 06/02/2016 0.723 0.7265Option 1
% to the total Payment 06/02/2016 09/01/2016 10/03/2016 11/01/2016 12/01/2016 Total Payment Effective Currency Rate % of Saving Amount of SavingFirst payment 50.0% USD 6,084,437.50 USD 0 USD 0 USD 0 USD 0Second 50.0% USD 0.00 USD 0 USD 0 USD 0 USD 6,048,693Option 2
% to the total Payment 06/02/2016 09/01/2016 10/03/2016 11/01/2016 12/01/2016 Total Payment Effective Currency Rate % of Saving Amount of SavingFirst payment 50.0% USD 6,084,437.50 USD 0 USD 0 USD 0 USD 0Second 12.5% USD 0.00 USD 1,512,345 USD 0 USD 0 USD 0Third 37.5% USD 0.00 USD 0 USD 0 USD 0 USD 4,536,520
Comparison Pay full on June 2ndNote: The price tag multiplied by June 2nd effective rate USD 12,168,875
USD 35,7440.29374%0.724366USD 12,133,131
0.29233% USD 35,573USD 12,133,302 0.72437625
FX Project ProductsAmount Price in AUD
Team Victor R100 1500 750$ Timothy R200 2000 1,250$ Monique R500 2500 2,250$ Andy R1000 1000 7,500$ Cynthia Total Cost
Inputs Date Market rate Bank Fee Actual Payment RateUSD/AUD 06/02/2016 0.723 35 bps 0.7265
Date Amount Total CostOption 1 06/02/2016 USD 6,084,437.50
12/01/2016 USD 6,048,693 12,133,131$
Option 2 06/02/2016 USD 6,084,437.5009/01/2016 USD 1,512,34512/01/2016 USD 4,536,520 12,133,302$
Difference 172$
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