2014 Risk Management Practices Survey

Foreign Exchange 2014 Risk Management Practices Survey FX Risk Management Practices Survey 1

Table of contents Executive summary...2 Risk management practices... 5 Survey participants...6 Risk management objectives...8 Risk management policies... 10 Budget rates... 11 Attitude toward risk management...12 Risk measurement methodologies...13 FX exposures... 14 Balance sheet exposures...15 Forecasted transactions...18 Foreign subsidiaries... 22 Additional risk management practices...25 Accounting convention...26 Risk management approach...26 Budget for hedging...27 Centralized risk management...27 Purchasing goods in China...28 Biggest challenges FX risk management...28 Currencies traded...29 Summary and conclusion... 30 2

2014 FX Risk Management Practices Survey Wells Fargo Foreign Exchange periodically surveys its FX clients to gather information about how they manage foreign exchange risk. The results have established valuable benchmarks in risk management practices and are made available to clients and prospects via this published report. Research findings also help Wells Fargo shape its product development priorities in order to serve the needs of its customers. Wells Fargo Foreign Exchange gratefully acknowledges the participation of the 276 customers who contributed their responses to this survey. We hope you find the survey s contents informative and a useful tool against which to measure your own practices in foreign exchange risk management. wellsfargo.com FX Risk Management Practices Survey 1

Executive summary 2

Current risk management environment FX risk management remains an increasing concern for companies. Nearly one in three (31%) respondents report that foreign exchange became a greater concern for them in the past twelve months. Among those who expressed increased concern, six in ten (58%) increased the amount of exposure being hedged and 43% have developed a new or revised an existing foreign exchange risk management policy. Risk management objectives Eliminating FX gains and losses remains the most important risk management objective for most companies. This objective is particularly important for public companies, with 62% listing it as their most important objective. Private companies are also concerned with eliminating FX gains and losses. Although less than half (43%) rate it as their top concern, it is rated first more frequently than any other objective. Exposures hedged The majority of companies hedge at least a portion of their current and forecasted foreign exchange risk. Seven in ten companies (71%) actively hedge foreign currency balance sheet positions and of these 68% hedge half or more of these transactions. Six in ten companies (59%) hedge forecasted transactions and of these 61% hedge half or more of these transactions. Hedging instruments Use of forward contracts remains a prevalent practice. Of the respondents who hedge FX risk, nearly all (98%) use forward contracts for balance sheet hedges and 93% use them for forecasted transaction hedges. Purchasing options is less prevalent with only 11% of companies purchasing options for balance sheet hedges and 12% purchasing them for forecasted transactions. 31% Nearly one in three (31%) respondents report that foreign exchange became a greater concern for them in the past twelve months. wellsfargo.com FX Risk Management Practices Survey 3

82% Most companies that hedge forecasted transactions will hedge these exposures for twelve months or longer. Hedge accounting Hedge accounting is employed frequently for forecasted transactions by public firms with larger revenues, but less often by smaller private firms. Three-quarters of public firms (76%) elect hedge accounting, compared to just half of private firms (52%). Seven in ten companies (71%) with greater than $500 million in revenues elect hedge accounting, while only half (50%) of those with revenues less than $500 million do so. Foreign exchange policy The existence of a formal written policy for managing foreign exchange continues to increase. Three-quarters of companies (74%) now have a formal policy compared to 58% in 2011 and 54% in 2009. While the existence of formal policies for foreign exchange has increased, the percentage of those who specified a minimum credit rating for counterparties decreased slightly (from 65% in 2011 to 60% in 2014). Most companies (82%) set budget rates as part of their formal planning process. Hedging strategy Systematic risk management is the predominant style for hedging forecasted transactions. Two-thirds of respondents (65%) say they currently manage risk systematically. Most companies (87%) manage risk on a centralized basis, with larger companies more likely to do so. Risk management challenges Perceived FX risk management challenges differ by company size. The biggest concern for smaller companies is market volatility, when to hedge, and using the proper strategy (66%), while accuracy and timeliness of data is the biggest challenge for larger companies (41%). 4

Detailed findings Risk management practices wellsfargo.com 5

Survey participants Parent company location 86% 14% U.S. Non-U.S. Company annual revenue 2% 12% 12% 9% 18% 14% 33% Less than $25 million $25 million to < $100 million $100 million to < $250 million $250 million to < $500 million $500 million to < $1 billion $1 billion to < $2 billion Greater than $2 billion 6

Have foreign subsidiaries? Industry 21% 79% Yes No 42% 14% 12% 6% 6% Technology Wholesale Trade Finance/Insurance Retail Manufacturing 20% Other Title within company Public vs. private company 40% Treasurer/Assistant Treasurer 18% 17% 13% Finance Manager/Cash Manager CFO Controller/Account Manager 52% 48% Public Private 12% Other wellsfargo.com FX Risk Management Practices Survey 7

Risk management objectives 18% vs. 3% U.S. based companies are more likely than those based abroad to say protecting the budget rate is the most important objective. 18% vs. 5% Importance of risk management objectives Half of all FX customers say that eliminating FX gains and losses is the most important FX risk management objective. Eliminate FX gains/losses 10% 8% 12% 17% 53% Protect the budget rate 32% 19% 16% 15% 18% Ranked first Second Third Fourth Ranked last Companies based abroad are more likely than U.S. based companies to say maintaining competitive advantage is the most important objective. Contribute to shareholder value Optimize U.S. dollar cash flow from foreign currency exposures Maintain competitive advantage 17% 13% 14% 12% 26% 7% 16% 23% 22% 25% 21% 28% 25% 29% 23% Note: Sums other than 100% are attributable to rounding. 8

Risk management objectives: Public The dominant reason for public companies to hedge is to eliminate FX gains and losses. Risk management objectives: Private 9% For private companies, eliminating FX gains and losses is important, though protecting the budget rate is also a concern. Eliminate FX gains/losses Protect the budget rate Eliminate FX gains/losses Protect the budget rate 10% 7% 8% 13% 62% 36% 14% 10% 18% 22% Ranked first Second Third Fourth Ranked last 10% 10% 17% 20% 43% 29% 25% 22% 11% 14% Ranked first Second Third Fourth Ranked last Contribute to shareholder value Optimize U.S. dollar cash flow from foreign currency exposures Maintain competitive advantage 5% Contribute to shareholder value Optimize U.S. dollar cash flow from foreign currency exposures Maintain competitive advantage 27% 10% 19% 15% 29% 22% 11% 33% 9% 25% 32% 30% 10% 22% 25% 19% 11% 26% 20% 20% 17% 23% 16% 25% 20% 27% 9% 23% 21% Note: Sums other than 100% are attributable to rounding. wellsfargo.com FX Risk Management Practices Survey 9

Formal FX risk management policy 86% Have a formal written policy Written formal policies have increased from 58% of companies in 2011 to 74% in 2014. 80% of companies update their policies on an annual basis. Total Private 59% Revenues > $500 million 86% 74% Public 88% < $500 million 53% Counterparty credit ratings Minimum credit rating for counterparties Public companies and those with revenues of greater than $500 million are most likely to require a minimum credit rating for counterparties. Total Private 52% Revenues > $500 million 68% 60% Public 66% < $500 million 38% 10

Use of budget rates Most companies (82%) set budget rates. 86% set them for 12 months at a time. Public companies are more likely to set budget rates than private companies. Source of budget rate Consensus forecasted rates continues to be the single most popular method for establishing budget rates, but more than half the respondents use prevailing spot, forward, or existing hedge rates. No one methodology represents a dominant practice in the market. Total 82% 42% 37% 35% Consensus forecasted rates 27% 25% 21% Prevailing spot rates In 2014, public companies are more likely to use prevailing spot rates (33% vs. 20% of private companies) and private companies are more likely to use consensus forecasted rates (44% vs. 32% of public companies) when determining budget rates. 91% 73% 16% 21% 17% 10% 9% 11% Prevailing forward rates Historical average rates 2014 Private Public 9% Not reported 2009-2011 9% 7% 12% 2011 2009 Blend of existing hedge rates Other wellsfargo.com FX Risk Management Practices Survey 11

Attitude toward risk management Attitude toward risk management Changes made to risk management approach 2% 58% 43% Increased the amount of exposure that is hedged Developed/revised FX policy 31% 20% Altered the mix of hedging instruments used 67% Unchanged Greater concern Reduced concern 16% 3% 2% 7% 5% Extended the average maturity of hedges Shortened the average maturity of hedges Decreased the amount of exposure that is hedged Other None 12

Methodologies used to measure risk Use of risk measurement methodologies Total 25% Public Private 18% 31% 28% vs. 18% Companies with revenues of $500 million or more employ quantitative and statistical methodologies more often than companies with revenues less than $500 million. Methodologies used for quantitative risk measurement Sensitivity analysis is the most common method for measuring potential risk from FX exposure. 65% Sensitivity 47% Value at risk (VAR) 41% Scenario analysis 5% Other wellsfargo.com FX Risk Management Practices Survey 13

14 Detailed findings FX exposures

Balance sheet exposures Companies that hedge non-functional currency booked assets or liabilities on their balance sheet Public companies are somewhat more likely to hedge foreign currency balance sheet positions than private companies. Total Private 63% 71% Public 77% Type of non-functional assets or liabilities on balance sheet Finance related 61% 65% vs. 39% Trade related 89% Of the companies with their parent company located in U.S., 65% have finance related A/L vs. 39% for those with their parent company located abroad. wellsfargo.com FX Risk Management Practices Survey 15

Percent of balance sheet positions hedged FX customers appear to be hedging a greater percentage of balance sheet positions compared to 2011. 16% 30% 28% 16% 14% 10% 24% 24% 22% 45% 32% 40% 2014 2011 2009 Less than 25% 25% to less than 50% 50% to less than 75% 75% or more Maturities of balance sheet hedges Balance sheet positions continue to predominantly have hedge horizons of less than three months. Hedge horizon 62% 63% 63% 2014 2011 16% 17% 23% 22% 20% 17% 2009 Less than 3 months 3 to less than 6 months 6 months or more 16

Balance sheet hedging instruments Nearly all balance sheet hedging companies use forward contracts as a derivative instrument. Hedge accounting election: Balance sheet hedges 98% Forward contracts 11% Purchased options 37% 37% 9% Option collars 27% Roughly one in three balance sheet hedging companies elect hedge accounting. 63% 7% Cross-currency swaps 5% 1% Participating forwards Forward extras One-fourth (27%) use other derivative solutions in addition to forward contacts to hedge non-functional foreign currency balance sheet positions. Yes No 3% Other Hedge accounting designation Cash flow hedge 68% Fair value hedge 42% wellsfargo.com FX Risk Management Practices Survey 17

Forecasted transaction exposures 86% Companies that hedge forecasted foreign currency revenues and expenses Total Private 59% 74% vs. 57% 59% Public 60% Companies based abroad are more likely than U.S. based companies to hedge forecasted foreign currency revenues and expenses. % of forecasted transactions hedged The prevalence of hedging forecasted foreign currency transactions has increased in the 50% to 75% category in 2014 compared to 2011. Percent of forecasted transactions hedged 44% 16% 27% 27% 22% 23% 16% 30% 35% 18% 20% 22% 2014 2011 2009 Less than 25% 25% to less than 50% 50% to less than 75% 75% or more 18

Maximum hedge horizon Forecasted transactions hedge horizons of one year or more continue to be common in 2014. Maximum hedge horizon for forecasted transactions 2014 37% 36% 2011 82% 2009 30% Most companies that hedge forecasted transactions will hedge these exposures for twelve months or longer. 18% 21% 20% 15% 15% 13% 13% 10% 11% 11% 10% 9% 6% 5% 6% 6% 5% 3% 3 months or less 6 months 9 months 12 months 18 months 2 years Greater than 2 years wellsfargo.com FX Risk Management Practices Survey 19

Layered hedge programs for forecasted transactions Large and public companies are much more likely to implement a layered hedge program for forecasted transactions. 77% Forecasted transaction hedging instruments Nearly all forecasted transaction hedging companies use forward contracts as a hedging instrument. Non-forward hedging solutions are more common for forecasted transactions than for balance sheet positions. Total 64% 48% Hedge instruments: Forecasted transactions 93% Forward contracts 18% Option collars Private Public 12% Purchased options Revenues 9% Participating options 31% > $500 million < $500 million 37% 74% 4% 3% 4% Cross-currency swaps Forward extras Other One-third (31%) use other hedging solutions in addition to forward contacts to hedge forecasted foreign currency transactions. 20

Hedge accounting election for forecasted transactions Public and large companies are more likely to elect hedge accounting for forecasted transactions. This behavior is consistent with public companies being more sensitive to earnings volatility and the visibility of their results. Total Private 52% Revenues > $500 million 71% 65% Public 76% < $500 million 50% Hedge accounting designation Most companies pursue a cash flow accounting designation. 89% 98% Assistance on hedge accounting A variety of partners are consulted for hedge accounting assistance with none being dominant. 44% 72% Accounting/audit firm 11% Internal software 14% 31% 40% Banking partner 3% Other All companies Private Public 4% 30% Third party vendor software 10% None Cash flow hedge Fair value hedge wellsfargo.com FX Risk Management Practices Survey 21

22 Detailed findings Foreign subsidiaries

Foreign subsidiaries Foreign subsidiaries most commonly operate in the euro region of Europe, the UK, China, and Canada. Regions where foreign subsidiaries operate Subsidiary functional currency Local/foreign currency U.S. dollar 71% Europe (euro region) 7% 9% 10% 11% 62% 61% 61% 50% 47% 45% UK China Canada Other Asia/Pacific Rim Mexico Australia 93% 91% 90% 89% UK Australia Europe (euro) India 12% 12% 12% 13% 88% 88% 88% 87% 40% Brazil Brazil New Zealand* Europe (non-euro) Japan 38% 38% 35% 27% 22% 21% 17% 16% Japan Europe (non-euro region) India Other South America Middle East Africa New Zealand Central America 15% 15% 20% 23% 85% 85% 80% 77% China Africa Canada Other Asia/Pacific Rim 24% 26% 31% 34% 76% 74% 69% 66% Other South America Mexico Middle East Central America* *Caution: small base sizes wellsfargo.com FX Risk Management Practices Survey 23

Hedging equity net investment in foreign subsidiaries A minority of companies hedge their equity net investment in local currency functional subsidiaries. Hedging equity net investment in foreign subsidiaries Ever hedged the equity net investment in foreign subsidiaries 18% Total 7% 9% Total 14% 8% 16% Private Public Private Public Hedging translated value of foreign currency net income Fewer than one in ten companies report hedging the translated value of foreign currency net income. Hedging translated value of foreign currency net income Ever hedged the translated value of foreign currency net income Total 6% 9% Total 8% 14% 8% Private Public 12% Private Public 24

Detailed findings Additional risk management practices wellsfargo.com 25

Accounting convention The average monthly spot rate is the most common accounting convention for foreign currency denominated transactions. Accounting convention used: Booking rate 8% The average spot rate for the month The prior month-end spot rate The daily spot rate 24% 18% 50% 24% vs. 12% Public companies use the prior month-end spot rate twice as often as private companies. Other Risk management approach to hedging forecasted transactions Two-thirds of companies prefer a systematic risk management approach. Dynamic hedging declined from a 9% response rate in 2011. Risk Management Approach 5% Systematic risk management Active hedging Dynamic hedging 30% 65% 26

Providing a budget for hedging A small percentage of companies provide a budget for hedging. Providing a budget for hedging Centralized risk management Companies of all descriptions are likely to manage FX risk on a centralized basis. Centralized risk management Total Total 87% 87% 8% 87% 8% 8% Private Public Private Public Revenues Revenues > $500 million 8% > $500 million 91% < $500 million 7% < $500 million 81% 89% vs. 75% Companies with a parent company based in the U.S. are more likely than companies with the parent company based abroad to manage FX risk on a centralized basis. wellsfargo.com FX Risk Management Practices Survey 27

Purchasing goods in China Over half of all companies surveyed purchase goods, materials, or services from China. Companies that purchase goods in China Currency used to purchase goods in China Total 55% 55% Private 55% Public USD CNY 24% 76% 88% vs. 65% Private companies are more likely than public companies to pay for these items in USD. Biggest challenges FX risk management Nearly half of respondents cite market volatility, when to hedge, and using a proper strategy as their biggest challenge. Biggest challenges related to FX risk management 66% vs. 37% Market volatility, when to hedge, and using a proper strategy Accuracy and timeliness of data Approvals, communications, and internal resources Hedge accounting and compliance Other 2% 8% 9% 47% 34% Smaller companies more frequently report market volatility, when to hedge, and using a proper strategy as a concern than larger revenue companies. Public/>$500 million Public companies and companies with $500 million or more in revenues mention accuracy and timeliness of data as their biggest challenges (45%, 41%). 28

Currencies traded Top currencies traded (ranked in top 3) 72% 45% 38% GBP (British pound) CAD (Canadian dollar) EUR (euro) 51% Half of public companies (51%) ranked the euro first compared to 35% of private companies. 17% 16% 15% 14% 7% 6% 5% 2% 1% 1% 1% 18% AUD (Australian dollar) JPY (Japanese yen) MXN (Mexican peso) CNY (Chinese yuan) BRL (Brazilian real) INR (Indian rupee) CHF (Swiss franc) SEK (Swedish krona) NOK (Norwegian krone) DKK (Danish krone) NZD (New Zealand dollar) Other 28% 28% of private companies ranked CAD first compared to 13% of public companies. 10% 10% of private companies ranked MXN first compared to 3% of public companies. wellsfargo.com FX Risk Management Practices Survey 29

Summary and conclusion The 2014 Wells Fargo FX Risk Management Practices Survey represents an effort to identify risk management practices from a broad cross-section of our customer base. In this year s survey, we observed many interesting patterns that reflect the dynamics of current market conditions and that often reinforce the behaviors that became apparent in our prior surveys from 2009 and 2011. The breadth of respondents now compiled from the three surveys and the similarity of results from the prior years provide a robust measure of how firms are managing risks in the current challenging environment. We hope that this analysis generates ideas for further consideration in your organization as you pursue more effective risk management practices. We welcome any additional feedback and inquiry that this survey summary may inspire. Contact us For additional information about our risk management solutions, contact your local Wells Fargo Foreign Exchange Specialist: Atlanta 1-800-520-7058 Charlotte 1-866-803-6722 Chicago 1-877-443-9134 Denver 1-800-477-9989 Houston 1-800-357-3249 Los Angeles 1-800-932-5239 Minneapolis 1-800-299-5810 New York 1-866-650-8217 St. Louis 1-800-832-6554 Salt Lake City 1-800-274-1046 San Francisco 1-800-548-1163 Seattle 1-800-985-8427 30

Legal disclosures Some of the information or opinions stated in this survey may have been obtained or developed by Wells Fargo from sources outside Wells Fargo. In such cases, Wells Fargo believes the information or opinions to be reliable. However, Wells Fargo will not have independently confirmed the reliability of such information or opinions and does not guarantee their accuracy or completeness or the reliability of their sources. The information and opinions in this survey, whether or not they were obtained or developed from outside sources, may not be appropriate for, or applicable to, some or any of your activities or circumstances. As a result, Wells Fargo makes no express or implied promises, commitments, guarantees, representations or warranties with respect to any of the information or opinions in this survey, including, without limitation, any warranty as to completeness or accuracy or any express or implied warranty of fitness for a particular purpose, and Wells Fargo assumes no liability for any loss that may result from your reliance on any such information or opinions. In providing the information and opinions in this survey, Wells Fargo is not giving you any economic, tax, accounting, legal or regulatory advice or recommendations, and is not acting in a fiduciary relationship with you. Before using or acting on such information or opinions, you should seek your own independent professional economic, tax, accounting, legal and regulatory advice and conduct a thorough and independent review of any transaction or strategy in light of your particular circumstances.

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