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Global Strategy in the Current Market Environment: Beyond Currency Risk

May 2015

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Today’s Speakers

Angelos Kontopanagiotis, CPA, CTPManager, Treasury Risk OperationsSpeaker

Company

Sector Specialty Retail Financial Services

Amanda Breslin, CFA, CTPDirector, Financial Risk Management

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Today’s Agenda

Tiffany’s hedge programsTiffany’s hedge programs

Types of FX Risk Management ProgramsTypes of FX Risk Management Programs

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33 Balancing conflicting objectives Balancing conflicting objectives 

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44 Managing hedge process workflowManaging hedge process workflow

55 Management reporting and stakeholder feedbackManagement reporting and stakeholder feedback

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Types of FX Hedging Programs

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How do FX risks impact financial statements?Income statement impact

Revenue

‐ Expenses

= Operating Income

± FX Gain/Loss

= Net Income

± OCI (CTA)

= Comprehensive Income

ForeignRevenue/Expenses

Booked

ForeignRevenue/Expenses

Paid

ForeignRevenue/Expenses

Forecasted

Re‐measurement Risk “Margin” Risk

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How do FX risks impact financial statements?Net investment risk primarily impacts the balance sheet

Revenue

‐ Expenses

= Operating Income

± FX Gain/Loss

= Net Income

± OCI (CTA)= Comprehensive 

Income

Net Investment RiskConsolidation of foreign subsidiaries

USDParent

ForeignSubsidiary

** OCI (CTA) can be thought of as unrecognized gains/losses that will be recognized when a subsidiary is sold.

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How do risk classifications differ?They have varying levels of visibility and magnitude

Revenue

‐ Expenses

= Operating Income

± FX Gain/Loss

= Net Income

± OCI (CTA)

= Comprehensive Income

Margin Risk.

Re‐measurement Risk.

Net Investment Risk

Above the line

Below the line

Visible?

Visible?

Visible? e.g. consolidation of foreign subsidiaries

e.g. monetary assets/liabilities on balance sheet

Can “hide” in revenue and expenses

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Challenge: The three FX risks may conflict and misalign with each otherIllustrative example: foreign subsidiaries

($) USD Parent

(€) EUR (€) EUR

($)($) USD Revenue ‐> A/R

Margin Risk: NoRemeasurement Risk: Yes

Translation Risk: Yes

( )(€) EUR Revenue ‐> A/R ( )(€) EUR Revenue ‐> A/R

Margin Risk: YesRemeasurement Risk: No

Translation Risk: Yes

Margin Risk: YesRemeasurement Risk: Yes

Translation Risk: No

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Tiffany’s Hedging Programs

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Targeted Programs and Products

FX ForwardsForecasted Inventory 

Purchases

Natural HedgesNon‐functional payables

FX Spot/Forwards

Misc. Interco (Royalties, Mgmt Fees)

Commodity ForwardsForecasted PreciousMetal Purchases

Interest Rate Swaps

Fixed‐to‐Floating

FX Spot/Forwards

Settling Interco Merchandise

FX ForwardsEUR payables

Programs may be classified by hedge product (forwards, swaps, options), risk type (margin risk, remeasurement, net investment), or asset class (FX, interest rate, commodities)

FX ForwardsIntercompany LoanRemeasurement

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Balancing Objectives & Managing Workflow

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How can we minimize our P&L 

impact?

Subsidiary Manager

Investors

Procurement

Sales & Marketing

Finance & Treasury

FX Risk: Balancing conflicting objectives

Board

Is our pricing competitive?

How much risk do we have?

How are we performing as a business unit?

Can we source goods cheaper elsewhere?

How volatile are my returns?

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Evaluating Hedging Programs

ProgramCosts

ProgramBenefits

Reduce P&L Volatility

Quantify Risk Exposure

Cash Flow Certainty

Manage Covenants

Trading Costs

Program Management

Cost of Not Hedging

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Stretching ResourcesOperational Workflow with a Lean Treasury Team 

Valuations andReporting 

Regulatory(EMIR, Dodd‐Frank,

Basel III)

Hedge AccountingResources

Hedge Structuring &Trade Execution

Monitoring CounterpartyRisk and Exposure

DocumentationNegotiations

Tax Considerations

Performance Monitoring Against 

Policy

Technology& Automation

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Demand Planning

ProcurementFinance & Treasury

Manufacturing

Senior Leadership External 

Reporting

1. Stakeholder Involvement2. Established Systems3. Hedging Policy4. Ongoing Communication and 

Reporting

Organizational Alignment

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Priorities and Initiatives Going Forward?

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Questions…

Angelos Kontopanagiotis, CPA, CTPManager, Treasury Risk OperationsSpeaker

Company

Sector Specialty Retail Financial Services

Amanda Breslin, CFA, CTPDirector, Financial Risk Management