PNC ADVISORY SERIES Managing Currency Risk with Foreign Exchange Options

PNC ADVISORY SERIES Managing Currency Risk with Foreign Exchange Options June 18, 2014, 2:00 p.m. ET Aaron: (OPERATOR) And with that, and without any further delay, let s go ahead and begin today s PNC Advisory Series webinar. It is my pleasure to turn the call over to our moderator for today, and that is Mr. Robert Giannone, Managing Director, Foreign Exchange, PNC Capital Markets. Robert, with that, I ll turn the call over to you. Robert Giannone: Great, thank you, Aaron, and good afternoon, everyone, and welcome to our PNC Advisory Series webinar. Today s webinar is on managing currency risk with foreign exchange options, and, again, I d like to thank you all for joining us. As Aaron mentioned, my name is Rob Giannone, and I m the Managing Director in PNC s Foreign Exchange Group, and I am based in Philadelphia. Before we get started today with the presentation, I wanted to highlight PNC s ongoing commitment to providing these sorts of market insights and ideas to our clients such as yourselves. This commitment is reflected in the types of conversations we have every day with all of our clients and prospects. I encourage all of you, when you have some time, to please go to our website, pnc.com/ideas. This website has a lot of content, really organized in a couple of key categories from maximizing cash flow to raising capital, mitigating risk, going international, and other topics that I think you ll find informative. Okay. Well, let s get started with today s event. We re excited to have here with us Kerry Stealey and Jason Sandusky with our PNC Foreign Exchange Group. Today Jason and Kerry will talk about using currency options, and how to integrate options into your currency risk management. Oftentimes, companies will start using forwards and consider using options in their hedging programs. Today Jason and Kerry will give you some actionable ideas to consider and strategies to use in helping you manage currency risk. So, with that, I ll turn it over to Kerry. Kerry Stealey: Thanks, Rob, and welcome, everybody. I m glad you could join us this afternoon. Options and option strategy can be really as simple or as complex as you want. Our goal today is not to explore those complexities, but rather just to provide you with an understanding of how options can play a significant role in successful foreign exchange risk management. We ll review some basic option structures, and then we ll go through a couple of case studies, which we hope will illustrate that options can be a very effective hedging tool. 1

So, why consider options? An option is a right, but not an obligation, to transact at a certain price, or, in this case, to exchange currency at a given rate, and that s called the strike rate. There are several reasons that options should be a part of your risk management program, but the key reasons are that they provide protection, upside, flexibility, and they can be customized to suit your needs. First and foremost, we re talking today about using options as a tool for hedging exchange rate risk, not for speculation. So, the main reason to consider using options is really for protection against adverse moves in exchange rates. You ve wisely that buying an option is like buying insurance. You buy insurance to protect your car, your home, assets, whatever, against disaster. So, again, the primary point is that options are a form of protection that should not be overlooked when you re managing your foreign exchange risk. The next point is that options provide potentially better rates. Unlike forward contracts that provide protection by locking into an exchange rate for a future delivery date, options don t lock you into a rate, but they provide protection with the potential for an even-better exchange rate, should the currency move in your favor. Essentially, you re hedging at an at-or-better rate. Thirdly, options are highly customizable. We can manipulate different option components, like premium or strike rates, or we can even manipulate the amount of upside potential to structure an option strategy that suits hedging needs for any given situation. We ll take premium, for example. You can pay a full premium for a certain strike rate or protection level, or you can create a structure that offsets that premium either partially or completely. Jason is going to talk a little bit more about how that works in a bit, and I think we ll also see an example of that in our case studies. Lastly, and often overlooked, options don t necessarily have to be held to maturity. They can be sold back to the bank, and they usually have some residual value for which you will be paid. By purchasing an option to hedge an exposure, or a potential exposure, you do have flexibility that you don t have with a forward contract. So, if circumstances change, like either your exposure itself changes or market conditions change, you can sell your option back and re-assess the situation. So, options provide customizable protection with upside potential and flexibility, and that s why you should consider them. We re also going to explore when it makes sense to when options make sense to use, but I did want to take a look at something that I found pretty interesting, and I think this really underscores the value of having upside potential in your hedging strategy. Everyone loves forecasts, and while it s always important to have a conversation with the experts or with your FX representation about economic fundamentals, as well as technical trends and other components that affect currency values, at the end of the day, we know it s impossible to predict any of the myriad of world events that might influence the value of a currency at a given time. 2

That being said, economic forecasts are a widely used tool by treasury managers, and they do play a role in pricing and budgeting. But if you take a look at this chart, it shows where the euro, the Canadian dollar, and the Mexican peso were trading in mid-may of 2013. It also shows the consensus forecast from 250 economic forecasters who were surveyed at that time as to where they thought the currencies would be trading one year out, in May of 2014. The last two columns show the actual spot rates in May 2014, and the difference between it and the forecast. So, the euro was trading at 1.2980 last May, with forecasters calling for the euro to weaken to 1.2710 in 12 months. In reality, however, the euro strengthened to 1.3757. So, that s just under an 8% difference. The Canadian forecast was virtually for an unchanged rate, yet the Canadian dollar weakened by just over 7%. And the Mexican peso also weakened, despite a consensus of 250 forecasters who called for it to strengthen. So, if you re an exporter being made 1 million, you may have considered that forecast for a weaker euro and hedged your sale of euros with a forward contract, and while that would have been good a way to protect you and the potential of euro weakness, it would have cost you the opportunity to benefit from what actually happened, the strengthening of the euro. So, on 1 million, in this case, had you locked in to a forward contract, you would have left about $78,000 on the table, upside. Upside is important, and I think it s important to take a look at the fact that there is a value attached to that. So, when do you consider options? I would argue that options should be considered more often than not, but as a guide, I think options are a more appropriate or most appropriate in the following situations. First of all, if your exposure is uncertain. For example, your firm may be bidding on a project in Canada, and quoting a price in Canadian dollars. Between the time when the bid is submitted and when the project is awarded, your company has exposure to movement in the Canadian dollar. In this case, buying a plain vanilla option is really the only way to protect the price quoted in the bid without creating an obligation for you if you re not awarded the contract. You will have to pay an upfront premium, but that cost can be factored into the price you re quoting on the contract. Next, when you need to hedge, but you recognize that there is potential for a better rate, and I think that last slide supports the argument that perhaps it s always a good idea to hedge with some upside potential. The opportunity cost of locking into a forward contract just may not be appealing, especially in times of high volatility. Thirdly, when you re unwilling to lock into a hedge at a rate that s worse than your budget rate. Sometimes we see short dramatic moves in a currency. Last April, for example, the Japanese yen traded from 93 yen per dollar to 99 yen per dollar in just a five day-period. This past January, we saw the Canadian dollar weaken from just above 106 to just under 112 in only three weeks. If you have an exposure, you can quickly find yourself in an unfavorable position before you ve had a chance to hedge it. By using an option strategy, you can fulfill your requirement to hedge, stem your loss, but still, potentially, get back to a better rate. Depending on circumstances, you may even be able to accomplish that with little or no premium. Hedging with a forward contract would lock you into that loss, without an opportunity to get back to making your budget rate. For an example, if you re an exporter we ll go back to the yen. If you re an exporter selling 3

product into Japan, and you have an unhedged receivable of 100 yen, you potentially could have lost value of $63,000 in just five days. You may not want to lock into that without having an opportunity to make that back. Conversely, if there s a favorable move before you ve had a chance to hedge, now you find yourself dealing from a position of strength. This is an ideal opportunity to protect your budgeted rate, and also acquire some upside potential for little or no premium, and Jason is going to explain how to do that how to go about that in just a bit. And the last little point here is when forward rates are in your favor. As you know, forward contracts are priced on a spot rate and then adjusted for the difference in interest rates between the two currencies. In currencies such as the Indian rupee or the Mexican peso, because their interest rates are higher than U.S. rates, you can buy the currency forward at a discount. So, this can create an opportunity to structure a zero-premium option that will protect you at or very close to your budgeted rate, but still with some additional upside potential. So, basically, you re being provided the same level of protection as a forward contract, but with free upside. So, anyway, now I m going to turn it over to Jason, and he s going to cover some basic structure of options. Jason Sandusky: Perfect. Thank you, Kerry. Before we actually get into the case studies that illustrate how you can use options, we want to spend a few minutes reviewing the basics. While we don t expect you to walk away from the webinar as an options pro or expert, we do want you to walk away with the understanding of how they can be used in managing your currency risk. As you may remember from your finance classes, an option gives you the right, but not the obligation, to buy or sell something. The classic example from finance classes is usually the right, but not the obligation, to buy a share of IBM. The same principles apply here today. However, instead of stock, we re working with currency. As Kerry mentioned, options contracts function similar to insurance policies. They require an up front premium, offer you a form of protection, and you re better off if you don t need to use them. The upfront excuse me, the upfront premium on an option is based upon four factors notional, tenor, strike and volatility. Next, we re going to take a look at each of these factors in a little more detail, and show you how you can customize an option to suit your exposure. The first three pricing factors are set by you, and you re able to tailor that to your particular exposure. The notional, simply defined, is the amount of currency you re hedging. It can match your total exposure or just be a portion of that. Similar to insurance policies, the higher the level of protection you re looking for, the higher the upfront premium or cost is going to be. The second factor you choose is tenor, which is just the length of the option contract, or the time until maturity. Here again, the longer the maturity, the higher the upfront premium is going to be, and that s a result of a longer period of time for rates to change or something to happen. The relationship between time and upfront premium in options is not a linear relationship, which basically just means that as time increases, the amount of upfront premium may not increase at that same pace. 4

The final factor that you set in an option is the strike rate, or the level of protection you re looking for. The closer you are to the current market rate or forward rate the strike price is, the more expensive it s going to be. Typically, what we see our clients do is buy options that are farther away from the strike excuse me, farther away from the forward rate to reduce the upfront premium. The fourth and final factor in an option in an option s upfront premium is a variable that you re actually not able to set. Currency volatility is just the variability of what that currency has done in the past or in a future period. Currencies in developing nations, such as Brazil, tend to have higher volatility. With that higher volatility, an increase in upfront premium comes with it. Now that we ve covered the basics of how options are priced, let s look at the most basic forms of options, which are vanilla calls and puts. As Kerry mentioned, options can come in many different forms and fashions, but the basis of what we re going to discuss today will be built around vanilla calls and puts. We typically find the easiest way to talk about using options is by using examples. As you can see in this client situation, the client has a need to buy or sell 1 million in six months time. They wish to have protection from an adverse rate move, but don t want to have to lock in to the forward rate. We can start with the situation on the left, where you re a buyer of euros. Maybe you need to pay a supplier or a service provider overseas, and you want to protect yourself against a depreciating euro. You would buy a call option. For a simple example, we could use the 6-month tenor, a notion of 1 million, and the strike of 1.36, which we ll use as an assumed budget rate. If in six months, at maturity, the euro is above 1.36, you re protected, and the option gives you that rate to the euro at 1.36, instead of the higher market price. On the other side, if in six months, at maturity, the euro is below 1.36, you are actually able to purchase euros at the lower market rate. The second scenario in this simple example is a good illustration of why you actually want your options to expire without having to use them. In this scenario, you re buying at a lower market rate, and if you have any additional exposure, you re able to put on a new hedge or layer on another hedge at this more attractive, lower rate. The other side of the example would be for someone who generates revenue in euros, and then they have the need to sell. They want to protect themselves against the depreciating euro, so, they would buy a put option. If we keep the same tenor, notional and strike for this simple example, the scenarios are, if in six months the euro has depreciated and is at or below 1.36, you re fully protected. You can sell that euro at 1.36. If in six months the euro has appreciated, and is above 1.36, you re able to sell euros at that higher, more favorable market rate. 5

We know that telling the difference between calls and puts can get confusing, so, during the course of the presentation, we ll try to speak more in terms of protection for a buyer of currency, or protection for a seller of currency. As we re going through the simple examples, the logical question our clients always ask is, why wouldn t I want to use one of these options if it gives me protection, but also allows me to fully participate in a favorable move in the currency? The standard answer that we usually get back is that the premium associated with the option is too high. In a few minutes, Kerry will actually address when it makes sense to pay a premium for options, but before we get into that, we want to introduce a way our clients are able to reduce or eliminate the upfront premium on options. This common method of avoiding or minimizing premiums is by using an option structure. It sounds, actually, a lot more complicated than it really is. The basic idea, is buy protection while selling some of the upside potential. The result typically leaves you with protection at a predetermined level and a range of rates you can participate in if the currency moves in your favor, up until a predetermined limit. And if we stick with the same situation as we used before, we can start again with the buyer of euros. Again, they re going to start by buying a euro call for protection against the euro appreciation. However, this time they re going to simultaneously sell some of the upside potential in the form of a euro put. By selling some of that upside potential, you have either reduced or completely offset the upfront premium on your protection. I think it is important right now to note that when you are selling an option, you may have a potential obligation, and you re selling someone else the right to either buy or sell currency from you. The same principles would apply for a seller of euros, just in reverse. So, in this instance, if you were a seller of euros, you d be buying the put option, which protects you against the euros depreciating, while selling a call option, which is the limit on the upside. While this idea may seem simple, we think it is really important that you understand, because it s going to be the basis for many different hedging tools we use. Now let s look at a real example called a collar, and if we stick with the euro exposure we ve been using, we can walk through how the collar actually works. In this example, you would need to purchase euros. You have the ability to lock into a forward contract at 137.50, but you believe the euro is going to weaken, so you don t want to lock in to that forward rate. In the example, you buy protection from the euro appreciating in the form of a call at 1.41, while selling the put, or the upside potential, at 1.33. If the euro appreciates and is at or above 1.41 at maturity, you exercise your call option, full protection, and you re able to buy at 1.41. If the euro is between 1.41 and 1.33 at maturity, you have no obligation, and you can buy euros at the current market rate. Now, if the euro has moved in your favor and has depreciated, and it is at or below 1.33 at maturity, your upside potential is capped there, and you re obligated to buy at 1.33. As you can see, you do have to give up a little something to have the ability to do better. In this example, you ve fully offset the premium, but keep in mind paying that premium may be able to improve the range or increase your upside potential. I ll hand it back to Kerry right now, and she ll talk about when it does make sense to actually pay premiums. 6

Kerry Stealey: Thanks, Jason. All right. So, at this point, we ve addressed why options should be considered, when they can be used, and how they can be structured. As Jason mentioned, one of the biggest reasons our customers sometimes tend to shy away from options is because they just don t want to pay premiums, and we certainly do quite a few zero-premium structures, because often that does accomplish the goal. But I want to take a look now at when it really does make sense to pay premiums. First of all, in a contingent situation like we ve talked about earlier. If the exposure you need to hedge is uncertain, buying a vanilla put or a call is really the only thing that s going to allow you to be completely protected but not at all obligated. However, you can try and manage your premium in that situation by looking at the probability of the exposure. Let s go back to our earlier example of bidding on a Canadian contract. You may only be, when you submit your initial bid, you figure you re about 50% certain you re going to be awarded that contract. So, you buy a put option to sell Canadian dollars that you ll be paid, should you be awarded the contract, but only on about 50% of what that exposure would be. As time passes and other bidders are turned away, you may say, hey, now the probability of winning this contract is more like 85%. So, you can buy another option, at which point the tenor will be shorter and the premium will likely be a little bit lower. Regardless of how you manage that, if you the point is, if you want to hedge an uncertain exposure, you are going to have to pay premium. Next, if you require protection, but you still want to have the flexibility to react to opportunities that arise with sudden market moves, or if you just feel strongly about the direction that a currency is going. For example, if you need to hedge a future purchase of euros, but you believe it will that the euro is going to continue to weaken, pay premium for a vanilla option. It will allow you to be nimble, while still giving you that safety net you need that s, you know, required when you require being hedged. As Jason pointed out earlier, it s buying an insurance policy that you really don t want to use. Thirdly, if you desire some upside potential, whether it be because you need to hedge an exposure for which the rate has already moved against you, and you need to make up for lost ground, or, again, simply because you have a view on the market. If you don t require unlimited upside, but you d like to have the opportunity to achieve a certain rate and a zero-cost structure just doesn t provide enough upside potential, you may need to pay some premium for that right. Since the upside would be limited to a rate that you determine, not unlimited, the premium you pay will be discounted. Here s a quick example to clarify that. Let s go back to the zero premium collar that Jason just illustrated. The client is buying euros, and in his example had protection at 1.41 and had upside down to 1.33. That was zero premium. You could choose to pay some low premium amount and improve either your upside or the protection level. So, you could pay some premium and take the upside potential from 1.33 to 1.31, say, if that was the rate you needed to achieve. Or 1.41 is just not a rate you can live with at a protection level, so you can pay some premium to improve that protection level from 1.41 to, say, 1.39. And so, it s going to be less expensive than buying an outright put or a call, but there is some premium involved, and I think we re going to see a little bit more how that works in a real example later. 7

Lastly, Jason explained that the factor in premium price the factor of premium price is not something that we can I m sorry. The factor in premium price that we cannot control or manipulate is the implied volatility. So, when volatility is low, it makes sense that premiums are less expensive. When premiums are less expensive, there doesn t really have to be much of a move in the currency in order for you to be able to recover your premium cost or get to a break-even point, once you ve bought an option. So, lower premiums make it easier to buy options for protection when you have a strong view on the currency. So, now I think we re going to go take a look at a couple of case studies. The first one illustrates how paying a premium has worked. So, it just kind of follows from from when it makes sense to pay premium. And I m sure that there are several of you on the line that can relate to this case study. If you re an exporter to Canada, you are already well aware of Canada the Canadian dollar s recent depreciation. You can see on the chart that this past January, Canada declined in value against the dollar by over 5%, which caught a lot of corporates by surprise. There has been some volatility since then, but most forecasters are calling for continuing weakness in the Canadian dollar. So, after that move up from 1.06, that kind of quick move up, most folks were a little reticent to sell Canadian dollars at these levels, which, in many cases, was worse was way off of their internal budget rates. Corporates with hedging requirements were even even found it less appealing to lock into a forward contract, because forward rates on the sale of Canadian dollars are even worse than spot rates, due to the fact that interest rates are still higher in Canada than in the U.S. So, we have had and continue to have a lot of discussions around option strategies to get protection with the opportunity to improve the rate. So, this example, one of our clients was being paid in process payments on the sale of a piece of machinery into their Canadian customer. Most of the payments were small, and weren t that big a concern, but there was one payment in six months time on CAD1 million, that they needed to hedge. And the rate had already you know, the depreciation in the Canadian dollar had already begun. So, we started looking at a zero premium option, just to kind of come up with some ideas for them. The zero premium structure we looked at was called a participating forward. Like a collar, the client will both will buy the right to sell their Canadian dollars at a certain strike rate, and then offset the premium on that by selling the right to buy selling the right to buy Canadian dollars, in this case, at the same strike rate, on only half of their exposure. In this case, the six-month forward rate at the time was 109.50, and the protection level for this option strategy was 1.11. But, again, there was no premium paid. So, if, at maturity, the Canadian dollar had strengthened, the client would sell half of the exposure or CAD500,000 at 1.11, and the other half at the better market rate. If the Canadian dollar did continue to weaken, and the forecasters were right, the entire CAD1 million would be sold at 1.11. 8

So, worst case is the customer would sell their CAD1 million, all of it, at 1.11, and the best case is they would sell half of their exposure at 1.11 and the other half at some better rate, but with no limit on the upside for that amount. I imagine your reaction is probably the same that our client s was, when he first looked at that. The forward rate of 1.0950 was bad enough, so they just could not live with a protection level of 1.11. So, we customized the structure a little, after determining what protection level they actually could live with. Because they were willing to pay a premium, we were able to improve the protection level to 1.0935, and use that ability to pay premium to improve that protection level. What we all decided on was paying a premium of $10,000, which moved the protection level from 109.50 to 109.35. So, it was better than the forward rate. But if the forecasters were wrong, and I think we ve seen that that s very possible, and the Canadian does strengthen over the next six months, the client will take advantage of it on an unlimited scale, for half the exposure. I also wanted to talk briefly about another situation, since there are so many of our customers that export to Canada. We recently had one customer who regularly sells Canadian dollars, about CAD3 million dollars a quarter. When the Canadian rate popped up near 1.12, they decided they needed to explore some other hedging strategies. So, we discussed options. The spot rate at the time when they finally decided they wanted to move forward with options, the spot rate had traded back down to 1.1050, so they decided it was a good time to buy what we call disaster insurance, the right to sell Canadian dollars at 1.12. For that right, they paid a premium of $16,000. $16,000 is a relatively low premium for a CAD3 million notional. One month later, we saw that the Canadian dollar was trading at 108.75. So, they decided to sell back the option. For that, they received a payment of $2,500, and they looked into a forward contract at 108.90. So, while they took a net loss on the premium of $13,500, which is the difference between the $16,000 they paid for the premium and the $2,500 they received back when they sold back the option, they more than made up for that, because there was a $40,000 increase in value in their underlying exposure. So, in this case, they wanted flexibility to respond to market moves. They were willing to pay premium for it, and it worked perfectly. In both these cases, the client was willing to pay a premium. The least favorable the situation you find yourself in, the more likely it is that you will have to be willing to pay some premium for the opportunity to improve the situation, but the fact is, there is a way to potentially improve the situation, and so, that s why we think it always makes sense to be open to looking at these strategies. Jason is going to cover a case study which is going to show you how zero premium option strategies work very well. Jason? Jason Sandusky: Thanks, Kerry. We re going to keep it close to home again. Our second case study is with the Mexican peso. 9

We see, as transportation costs have increased around the world, we see manufacturers looking to shift some of their production facilities a little closer to home, and Mexico s been a popular destination. The result of this is, for our clients to have a fairly predictable amount of pesos that they need to purchase on a regular basis, and, if the peso appreciates it s going to directly increase their cost of goods. And, as you can see, the peso s been a very, volatile currency, over the past five years, one of the most volatile among major currencies. As Kerry mentioned before, currently interest rates in Mexico are higher than in the U.S., and that difference in interest rates makes purchasing the peso in the forward market cheaper than the current market or spot rate. The combination of high volatility and the forward discount for buyers of the peso make it an attractive currency to hedge. A commonly used zero premium structure for buyers of the peso is the enhanced collar strategy. It builds upon the collar example that we went through earlier in the presentation, but is going to incorporate a barrier or a trigger on one of the options, which results in an increase in the upside potential. The strategy is probably best explained with an example. In the example, you have the need to buy pesos in six months time with the current market rate of 12.8050. You re uncertain of what the peso will do over the next six months, so you have a couple of choices. You could lock in the forward rate at 12.95. Then you ll know what your rate will be in six months time, and you re taking advantage of the cheaper forward rate. Or, you could use an option structure to provide protection but with the possibility of benefiting from a weakening peso. In the enhanced collar strategy, you re buying a call option, which gives you your worst case rate at 12.50, and you re selling the put option at 13.25, with a European-style barrier or trigger at 14. The barrier, or trigger, on this put option activates it if the peso is at 14 or higher at maturity. The result of these options is that at maturity you have protection at 12.50 with upside potential all the way to 13.9999. If the peso depreciates and is at 14 or higher, you re knocked back to the put strike and obligated to then buy pesos at 13.25, but that 13.25 is still actually better than the forward rate. We see many customers use this strategy and actually use the knock-back as a signal to layer on additional hedges at the new or more advantageous market rate. As you can see, by introducing a barrier or trigger, you can give yourself opportunity for further upside potential. This hedging tool can effectively be used when buying other currencies that share some of the same characteristics as the Mexican peso, such as the Indian rupee, the Chinese renminbi or the Korean won. Now, I know we ve covered a lot of material in a short period of time today, but what we hope you take away from the discussion is the value of incorporating options into your hedging policy. We also encourage you to reach out to your foreign exchange representative to discuss whether options may be suitable for your particular exposures. I ll now hand it back over to Rob for the Q&A. 10

Robert Giannone: Great. Thank you, Jason. Thank you, Kerry, for a great presentation. We d like to now open up the session for questions. As a reminder, you can ask a question using the Q&A window located on your screen. If, for some reason you don t see the Q&A window, you can click on the Q&A widget found in the lower center portion of your screen. Let s take a look at our first question: Are collars appropriate to use when there is uncertainty in the underlying exposure? Kerry Stealey: Collars are remember, they re a zero-cost option which are created by both buying and selling and option. So, you re buying the right and you re selling the right. So, if your exposure is uncertain, you re you may be creating an obligation for yourself by selling that one side of that option. One thing, though, I think I can go back to the example that we used for some uncertain situations is, you can assess if you can assess the certainty of something, you know, there is a certain a degree of certainty to what your exposure is. For example, if you re forecasting sales and looking at what your sales are going to be and trying to hedge that, you could argue that you re going to have $1 million in sales in a given period. You may not quite get $1 million in sales, in which case it probably would it would not make sense to use a collar or a zero-cost strategy to hedge a full million, but you could be fairly certain that your forecast of $1 million sales is going to at least by 50% right and use a zerocost structure to hedge a portion of that. But in the situation that we talked about earlier, where you re bidding on something and you don t know if you re going to have an exposure or have zero exposure, then a collar would not be the way to go. Robert Giannone: Thanks, Kerry. Next question is, I have exposure in China. Can I use options to hedge this exposure? Jason Sandusky: The simple answer to that question is yes. And what we ve seen over the last few years, the Chinese have actually begun to liberalize their currency market. We have a lot more capabilities than we ve had in the past in terms of hedging in China. As I mentioned during the presentation, the enhanced collar strategy is very attractive, also, in the Chinese renminbi, as interest rates are higher in China than in the U.S., and there are many other strategies that you could use in China, as well. Robert Giannone: Okay. Thanks, Jason. Next question: Do all options require delivery of currency, or can I use options as an overlay hedge and cash settle in U.S. dollars or another currency? Kerry Stealey: Yeah, that s a good question. All options do not require delivery of currency. As a matter of fact, we often use options to hedge exposures in currencies that are controlled. So, we look at doing an option and set up, for example, a non-deliverable forward is an alternative way of hedging there. 11

So, you do not actually have to take delivery or deliver the currency when you use an option. You can certainly cash settle. So, it would be a good overlay hedge if you just settle up in dollars at maturity. Good question. Robert Giannone: Okay. Thanks, Kerry. You talked through some transactional examples. What about situations where you have ongoing recurring revenues or forecasted transactions like for services and other expenses? Jason Sandusky: That s another really good question, and, oftentimes, when we work with companies that have a continuing exposure, we advise them to take a dollar-cost-averaging approach where maybe the first few months of their exposure they ll be completely hedged, the next three months at 75 and dropping down as you go with quarters. And one of the nice things about using a strategy such as the enhanced collar in a situation like this is, if the if we go back to our peso example, if the Mexican peso is depreciating, you re actually able to dollar-cost-average the rate down, while still having that protection. Kerry Stealey: And I think, also, in the enhanced collar structure that Jason talked about, option structures are ideal if you have an ongoing exposure, because, you know, we talked about how backing up a little bit more, we talked about how you re buying protection. You re buying a policy you don t want to use. Whether or not you re paying for it, if you re using the zero-cost structure with a barrier or you re using outright puts or calls, if the currency has moved such that you re not going to exercise your put or your call, or in the barrier example you ve gotten knocked back into a forward rate, that s only a better situation for you. So, it makes the case for the fact that you have built some upside in there. So, if you have an ongoing exposure, creating upside is great, because you can you know, you continually take advantage of that. You have your protection, but you have the ability to continue to take advantage of the upside on your next layer of hedging. Robert Giannone: Thanks, Kerry. Next question: What if I don t know a specific date of delivery for a currency? Am I able to do a window, like in the case of a window forward where I have a period of time to exchange one currency for the other? Or am I otherwise able to change the date on the option? 12

Jason Sandusky: That s a really good question and a pretty common question we get when we start to talk about options. You don t have the ability to do a window on an option contract as you can with a forward contract. However, you are able to either bring in so, if you need delivery of currency sooner, there are mechanisms that allow you to bring that in, as well as push it out to a future date. So, we do have the ability to change dates, if needed. Robert Giannone: Okay. Do I need to have credit with PNC in order to do options with PNC? Kerry Stealey: So, that s a good question, too. If you are buying a plain vanilla put or a call, which we keep likening to buying an insurance policy, then there [is a conditional] credit approval required. However, if you are doing some of the zero-cost structures, we have an internal credit approval process prior to entering in to the transaction. However, I would say, if any of you listening are already foreign exchange customers of PNC, you probably already have that approval in place. So, it s more of an internal guide for us, but there is some credit component to it. Robert Giannone: Okay. Are these option structures available in other non-deliverable currencies, like Brazilian real, Argentine peso, Philippine peso, Korean won? Jason Sandusky: Yes. Most of these strategies are available, but there is a distinction that we need to make. A lot of emerging market central banks tightly control the currency markets, and they prohibit the existence of a forward market, and the result of that is having to hedge in a non-deliverable fashion. And all non-deliverable means is that there s no actual delivery of physical currency. It s just cash settling in U.S. dollars. But you are able to do the, you know, the enhanced collar, collars, and these sort of structures in the majority of those currencies. You probably would want to check with your foreign exchange representative if just to be sure that the emerging market currency you re specifically looking at is available. Kerry Stealey: Some of the emerging market currencies, as well, are just are going to be a little bit limited in terms of tenor. I mean, you know, there may only be a market going out two years or, you know, that s kind of far, already, anyway, but there are going to be slight differences between some of the emerging market currencies versus the majors, but the short answer is, as Jason said, yes, we can do that. 13

Robert Giannone: Okay, great. Well, thanks to everyone in the audience for asking some very good questions. That s the that was the last question we had for the session. So, I d like to thank Kerry and Jason for some great insight and perspective on how to integrate options into your currency risk management program. I d like to remind everyone that there s a PDF available of today s presentation, as well as a CTP certification credit certificate that you can download from the green resource list file widget in the lower center portion of your screen. We d also like to ask you to take a short survey on the screen. As we mentioned before, we really value and appreciate your feedback, and your feedback will help us plan future events that are of interest to you. So, again, this concludes our presentation and, again, thank you for joining us and enjoy the rest of your day. The materials that you are viewing were prepared for general information purposes only and are not intended as legal, tax or accounting advice or as recommendations to engage in any specific transaction, including with respect to any securities of PNC, and do not purport to be comprehensive. Under no circumstances should any information contained in those materials or video be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any opinions expressed in those materials or videos are subject to change without notice. Investment banking and capital markets activities are conducted by PNC through its subsidiaries PNC Bank, National Association, PNC Capital Markets LLC, Red Capital Markets, Inc., and Harris Williams LLC. Services such as public finance advisory services, securities underwriting, and securities sales and trading are provided by PNC Capital Markets LLC and Red Capital Markets, Inc. Merger and acquisition advisory and related services are provided by Harris Williams LLC. PNC Capital Markets LLC, Red Capital Markets, Inc., and Harris Williams LLC are registered broker-dealers and members of FINRA and SIPC. Harris Williams & Co. is the trade name under which Harris Williams LLC conducts its business. 2014 The PNC Financial Services Group, Inc. All rights reserved. CIB ENT PDF 0614-0148-180478 14