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14THE TREASURERCASH MANAGEMENT SUPPLEM
14THE TREASURERCASH MANAGEMENT SUPPLEMENT WINTER 2009he wocu or World Currency Unit was launched inquote Howard Flight, fund manager,politician and the author of ÒAll You Need To KnowAbout Exchange RatesÓ, the definitive work on foreignexchange: ÒCorporate treasurers and ACT members will reallylike the wocu concept as it reduces volatility and exchangerate risk.팀wocu is a synthetic currency created from a basket ofworldÕs top 20 national economies (asmeasured by GDP) and weighted by means of a GDP-basedalgorithm. The wocu has been developed over a number ofyears, initially by a former Reuters senior manager who hadthe idea while looking at a standard Reuters FX/FX foreignexchange screen. He transferred the US dollar from the top ofeen into the body of the screen among the otherAfter some years of further research the WDX Organisationwas formed and investment raised in 2009. The ITinfrastructure has been built and wocu prices can now beof article for URL). Wocupricing is currently available in a non-tradable form and atradable wocu should by available by 1 January 2010.The constituent countries, and the weighting factors willch into foreign exchange andinternational trade. It was set up and will initially be fundedy the WDX Organisation. It is made up of experiencedofessionals and leading academics, and will meetto confirm themembership of the top 20 countries by GDP and theirThe structure of the wocu makes it much less volatilethansovereign national currencies because it is a balancedbasket of currencies. It is totally apolitical as the wocuweighting algorithm is managed by an independent institute,ence, unlikesovereign national currencies whose exchange rate value isThe European Community created its own basket currencyin 1979, the ecu. But while it was embraced by corporatetreasurers, it was not very popular with foreign exchangetraders. The ecu represented a basket of the sovereignnational currencies of European Community members, but itovertaken by the rise of the euro, which is effectively aency for most EU states, and so heavilyinfluenced by political decisions. WHY WE NEED THE WOCU Recent FX currency marketvolatility and uncertainty has focused attention on the needfor an apolitical, non-sovereign balanced currency. Storiesof large multinational companies losing very largewill, by reducing volatility, significantly reduce hedging risksand related hedging costs as less hedging will be required; byvirtue of being less volatile, it will also be less expensive tocash managementFOREIGN EXCHANGEGaining currencyTHE LAUNCH OF A SYNTHETIC BASKET CURRENCY COULD HELP CORPORATETREASURERS TO INSULATE COSTS AND REVENUES FROM ECONOMIC ANDPOLITICAL VOLATILITY, AN

D FREE MULTINATIONALS FROM EXCHANGE RATE
D FREE MULTINATIONALS FROM EXCHANGE RATE RISK.HILLIER-BROOKAND KEN LILLIE THE CASE FOR THE WOCU.Executive summary With an unsuccessful FX hedging strategy able to lose amultinational company large sums of money in afrighteningly short time,the time may have come fortreasurers to push their banks to adopt the wocu,anapolitical,non-sovereign balanced global currency. ash managementFOREIGN EXCHANGEhedge. A financial engineer recently stated that reducingvolatility by a factor of two would reduce hedging costs by afactor of four.Below are two possible uses of wocu by multinationalScenario 1: ompany A has a global product but its salese in a domestic currency. It therefore prices itsproduct in wocu or sets a local price based against wocu (setor whatever, based on unit price, market,etc). The sale is then effected in local currency or thecompany asks its bank to receive funds and FX into localcurrency based on a wocu amount (or to receive a localScenario 2: Company B has buyers in different countries anddifferent countries, so it make no sense to exchangeency only subsequently to convert itmaintained for taking and disbursing funds to satisfy thethe commodity. The only transactioninto local currency is for the ÒprofitÓ element.Charities and other not-for-profit organisations are facedwith the same problems as companies as they also raisevolatile Ð countries and currencies. The ability to conductcurrencies will reduce their risks and thus their costs.Like the wocu, the International Monetary FundÕs specialdrawing rights instrument is an international artificial basketcurrency, but one that is more political and less wellbalanced. It was created in 1969 to support the Brettonoods fixed exchange rate system, but survived the collapsefor such things as internationalpostage, roaming charges for mobile phone companies and insome areas of international shipping and transport. However, the IMFreweights its special drawing rights onlyevery five years and uses only four currencies (dollar, sterling,yen and euro), so its ability to facilitate multinational tradeough reduced volatility is limited. Special drawing rightsdoes the instrument reflect the worldÕs rapidly emerging BRIC(Brazil, Russia, India, China) economies, nor the growth ofany other emerging economies. CASH MANAGEMENT SUPPLEMENT WINTER 2009THE TREASURER15Figure 1:Distance from baseline:wocu and euroFigure 2:Distance from baseline:wocu and sterlingFigure 3:Volatility from baseline:wocu and euroFigure 4:Volatility from baseline:wocu and sterlingTHE WOCU WILL, BY REDUCINGVOLATILITY, SIGNIFICANTLYREDUCE HEDGING RISKS ANDRELATED HEDGING COSTS ASLESS HEDGING WILL BEREQUIRED; BY VIRTUE OF BEINGLESS

VOLATILE, IT WILL ALSO BELESS EXPENSIVE
VOLATILE, IT WILL ALSO BELESS EXPENSIVE TO HEDGE.ricing based on US dollarpricing based on US dollar16THE TREASURERCASH MANAGEMENT SUPPLEMENT WINTER 2009cash managementOREIGN EXCHANGEy comparison, the wocu is reweighted and itsconstituents updated every six months by the WDX Institute.There is no political interference and its value simply reflectsthe GDP of the worldÕs 20 biggest economies. It is thereforeeminently suited to the conduct of international trade andthe reduction of volatility and risk in the modern world.A TRADED INSTRUMENT A number of major Europeanbanks are in discussion with the WDX Organisation and haveexpressed a willingness to settle both ends of a commoditytrade conducted in wocu. They have indicated that over timethey will support wocu-denominated accounts, so companiescan hold wocu rather than simply settling trade in thecurrency. Multibank dealing system vendors have alsoindicated that as soon as the wocu is traded by major banksthey will make it available on their systems. The WDX Organisation is also in discussions withinternational exchanges and clearing houses to develop tradenot only in wocu but also in futures, options and otherderivative instruments.wocu is unaffected by specific regulatory issues. Theof the WDX Institute and riskand regulatory management within major consulting firms isof currencies it does not requirespecific regulatory approval.A roundtable of invited corporate treasurers recently heldto discuss the application of the wocu in the corporate,for the very near future.The next step is to work with corporate treasurers andto facilitate trade denominated in wocu, and withers, exchanges and clearing houses to ensure that thelaunch of the wocu will take place by 1 January 2010.the time is right for the wocu. There hasbeen much publicity recently about the desire of manycommodity producing nations to move away from the USdollar as the de facto global reserve currency. An apoliticaland less volatile instrument is needed as the global economychanges, financial power moves east and the emerging BRICeconomies take over from the leading financial powers of theging economies grow, their currencies can becomepart of the wocu by virtue of GDP growth rather than politicaltreasurers will work withtheir banks not only to price trade in wocu, but also to holdassets and even price bonds in wocu. The wocu is an ideawhose time has come.ector of WDX Organisation.ianh-b@wocu.com .wocu.comTreasury Consulting.ken@lillieassociates.eu For wocu prices, go to: www.wocu.comAN APOLITICAL AND LESSVOLATILE INSTRUMENT ISNEEDED AS THE GLOBALFINANCIAL POWER MOVES EASTAND THE EMERGING BRICECONOMIES TAKE OVER FROMPOWERS OF THE LAST CENTURY.