Description
It is a common refrain in business today that the international strength of the Canadian dollar, best illustrated by parity with the U.S. dollar today after flirting with 60-cent territory a decade ago, is a competitive disadvantage to a trading nation such as ours. It is clearly not a fatal disadvantage, given the international reach of many of our leading companies.
FOREIGN EXCHANGE RISK
MANAGEMENT: PERSPECTIVES
FROM FINANCIAL EXECUTIVES
ACKNOWLEDGEMENTS
We gratefully acknowledge the eforts of our survey respondents and our forum
participants who took valuable time away from their day jobs to participate in
this work. We are particularly grateful to our research partner, CIBC, without
whom this study would not have been possible.
Christian Bellavance
Vice President, Research and Communications
Financial Executives International Canada
Copyright 2013 by Canadian Financial Executives Research Foundation (CFERF).
No part of this publication may be reproduced, stored in a retrieval system or transmitted
in any form or by any means, electronic, mechanical, photocopying, recording or
otherwise, without the prior permission of the publisher.
This report is designed to provide accurate information on the general subject
matter covered. This publication is provided with the understanding that the author
and publisher shall have no liability for any errors, inaccuracies, or omissions of this
publication and, by this publication, the author and publisher are not engaged in
rendering consulting advice or other professional service to the recipient with regard
to any specifc matter. In the event that consulting or other expert assistance is required
with regard to any specifc matter, the services of qualifed professionals should be
sought.
First published in 2013 by CFERF.
1201-170 University Ave.
Toronto, ON
M5H 3B3
ISBN# 978-1-927568-06-4
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
CONTENTS
Executive summary / 2
Methodology and demographics / 4
Defning and understanding FX risk / 5
Doing business in emerging markets / 8
FX risk in action: Who is in charge? How is performance measured? / 10
Canadian dollar parity: Boon or hindrance / 19
Conclusion / 20
Appendix A: Demographics / 22
Appendix B: Forum participants / 24
Appendix C: Glossary / 25
/2
EXECUTIVE SUMMARY
It is a common refrain in business today that the international strength of the Canadian
dollar, best illustrated by parity with the U.S. dollar today after firting with 60-cent
territory a decade ago, is a competitive disadvantage to a trading nation such as ours. It
is clearly not a fatal disadvantage, given the international reach of many of our leading
companies. For most organizations, foreign exchange risk – and its management –
are challenges for which there exists an emerging and ever-more sophisticated set of
policies, procedures and tools.
Canadian businesses continue to adapt to an increasingly complex currency universe.
They cannot predict with any certainty the future value of the euro, Japanese yen or
even the U.S. dollar, but they can and do mitigate the risk of currency fuctuations with
proactive business practices supplemented with products such as swaps, futures and
options backed by well-thought out policies designed to ensure that they are not taking
on too much risk.
What is clear according to this study by the Canadian Financial Executives Research
Foundation (CFERF) is that foreign exchange risk is a major issue. In fact, 90% of
organizations surveyed rated foreign exchange management as an important
consideration in their business. However, just over one half of organizations participating
in the survey have a policy or formal process/procedure in place to FX manage risk.
This would suggest that some organizations could beneft from a more structured
approach to managing their FX risk.
Canada’s status as a trading nation has created a generation of fnancial executives who
are keen currency watchers. Illustrating the critical role currency fuctuations can play
with regard to revenue and proft, four out of fve respondents (80%) said that they track
foreign exchange by currency unit, either manually or with an automatic feed.
Managing foreign currency risk is no longer simply a case of guarding against changes
in the respective dollars of the U.S. and Canada. A surprising 42% of Canadian fnancial
executives surveyed said that they are now doing business in fast-growing emerging
markets, where currencies can be volatile or under strict government controls.
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
/3
Responsibility for managing FX risk generally lies near the top of Canadian businesses.
In the majority of cases the CFO, VP of Finance or Treasurer has direct responsibility for
controlling FX risk and many of those executives report directly to a board committee
charged with monitoring the business’ foreign exchange exposure.
Canadian companies take a “do no harm” approach to FX risk management, borne out
by the stated goals of their FX hedging programs. Hedges are not created as speculative
bets with the hope or expectation of windfall gains out of currency fuctuations, but
are created instead to protect against short-term changes in exchange rates, provide
certainty for purchases and/or sales and short-term cash fows in home currencies or
neutralize the balance sheet impact on working capital and long term capital.
Organizations employ a sophisticated range of processes to mitigate exchange rate
impacts, such as diversifying their foreign currency holdings, adjusting selling prices in
response to exchange rate volatility, borrowing in foreign currencies and limiting longer
term contractual arrangements to lessen the impact of currency fuctuations.
Canadian businesses understand the risks that come with failing to insure against
possible foreign exchange shifts. Those include the potential for lower revenue and
profts, loss of market competitiveness, the potential for higher interest costs and
debt levels in a foreign market and the uncertainty that comes with controlled or
managed currencies.
Currency fuctuations are a serious concern for one in four of the survey respondents.
Negative efects range from a loss of competitiveness in a foreign market to shrinking
proft and sales to a reduction in reinvestment in the parent company.
Most fnancial executives have come to grips with changing international fnancial
regulations, based on responses to the survey. Nearly one half now use IFRS (International
Financial Reporting Standards) and are considering the implications of Basel III with
respect to foreign exchange. “We expect higher credit charges for longer tenor hedging
and a contraction of credit availability from our counterparties,” said one respondent.
EXECUTIVE SUMMARY
/4
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
Canadian companies also managed the high volatility of foreign currencies versus the
U.S. dollar in the time after the collapse of Lehman Bros., one of the events that triggered
the international fnancial crisis. “Since 2008, we have increased hedge ratios, shortened
hedge tenors and spread out the rollover time frames to avoid large maturities in a
specifc month,” explained one survey participant.
Foreign exchange risk management should be a component of a Canadian company’s
international growth strategy, but slightly more than one half of the organizations
surveyed have a policy, formal process or procedure in place to manage FX risk.
If Canadian companies are going to continue to grow – and play a larger role on the
international business stage – they must be able to utilize an expanding set of tools and
policies designed to manage, minimize and even prosper from foreign exchange risks.
The following pages provide valuable insight for companies seeking to establish their
own policies and procedures to deal with the risks of selling and buying products in
foreign markets and with operating in foreign currencies.
METHODOLOGY AND DEMOGRAPHICS
The Foreign exchange risk management: Perspectives from fnancial executives report is
based on the results of an online survey that took place between November 26, 2012
and January 3, 2013, during which time 109 respondents completed the survey. These
results were expanded with insights gathered during an executive research forum that
included participants in Montreal, Toronto and Calgary on November 28, 2012. Of the
survey respondents, 50% worked for private companies and 37% for public companies.
42% of respondents were CFOs while 15% held the title of VP Finance. Four out of 10
(40%) represented companies with revenue of less than $50 million. See Appendix A for
more details on demographics.
/5
DEFINING AND UNDERSTANDING FX RISK
DEFINING AND UNDERSTANDING FX RISK
Foreign exchange risk management: Perspectives from fnancial executives seeks to
discover how organizations defne and understand foreign exchange (FX) risk, and
what policies, procedures and fnancial instruments they utilize to manage the risk of
currency fuctuations.
Given the international nature of business today and Canada’s status as a trading
nation, foreign exchange is of increasing concern to most businesses today. Three
out of four respondents in the study reported that some percentage of their revenue
is denominated in a foreign currency and 17% reported that 76% to 100% of their
revenue is denominated in a foreign currency. One small marketing company, which
does most of its business in the U.S., looks upon the upward climb of the Canadian
dollar with dread. “We would rather have a 60-cent Canadian dollar,” said the VP Finance
of the company. “We primarily have U.S. net cash coming in and then all of our operating
needs are Canadian-dollar denominated.”
Ali Jinnah, Director of Financial Risk Management with Bombardier Inc., deals with
currency complexity on a daily basis as a result of the transportation giant’s geographically
dispersed manufacturing operations. “In our European rail operations, we have production
facilities in 60 diferent countries, leaving us with large scale FX exposures in a multitude of
currency pairs, both from a cost perspective and from the revenue side. On the aerospace
side, revenues are primarily in U.S. dollars, while our production facilities are in Canada,
Mexico and the U.K., resulting in a diverse mix of FX exposures for our cost base. To top
that all of, at the consolidated level we report in U.S. dollars.”
Export credit agency Export Development Canada noted in a recent foreign exchange
white paper that Canadian companies that are active in international markets view
volatility in the Canadian dollar as the number one constraint to growing exports. The
CFERF foreign exchange risk management study similarly found that organizations
consider the management of FX risk to be a critical task. More than two-thirds of
respondents (68%) rated foreign exchange management “extremely important” or
“important.” Just 10% rated FX management “not at all important.” However, only about
half actually had a policy or procedure in place to manage risk.
/6
FX risk can negatively afect cash fow and proftability both in the short and long
term. Changes of more than 5% in the value of the Canadian dollar relative to the U.S.
dollar are commonplace over any typical 60-day period. Viewed over the longer term,
the Canadian dollar has broken out of a narrow, stable trading band with the U.S. that
prevailed from 1994 until 2007. The fnancial crisis of 2008 resulted in three years of
extreme currency volatility, and risk. “The swings in the U.S.-Canada currencies became
very extreme,” said Mary Mulqueen, Managing Director of Foreign Exchange Sales with
CIBC. “So companies that aren’t addressing risk management would have experienced
that in a major way and would be feeling it now. 78% of our exports are still to the
U.S. and even for those companies that are expanding into Asia, most of their trade
is denominated in U.S. dollars. We expect that to change and evolve over time, but
currently the U.S. dollar is the key counterparty currency for Canada.”
Of the organizations that monitor currency risk, the majority track it the old-fashioned
way by manually entering currency values, with only a small minority utilizing an
automatic feed. “All our sales and the majority of payables are in USD,” said one
respondent. “A separate USD account is maintained. Profts are drawn from this account
and converted to CDN when benefcial.”
Virtually all organizations participating in the survey had some amount of payables
denominated in a foreign currency. Nearly three quarters (73%) had 1-50% of payables in
a foreign currency while 23% had more than half of their payables in foreign currencies.
“Mostly we deal in foreign countries, so Latin America, South America, Western Africa,
Mongolia,” said Allan MacDougall, Global Finance Director of mining contractor Dumas
Contracting Ltd. “We pay most of our costs in the local currency and most of our contracts
are in U.S. dollars.”
Our company raised a signifcant amount of debt in the U.S., more than was actually
needed to fund our operations and our capital requirements down there. As a result, we
loaned a portion of those funds to our Canadian parent. The issue with that is then we
ended up with a U.S. dollar liability in Canada that had to be revalued and translated back
into Canadian dollars at the end of every month. So ultimately, this created a signifcant
amount of P&L volatility in our consolidated fnancial statements.
Dean Leskowski – Manager of Treasury and Risk Management, Calfrac Well Services
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
“
”
/7
DEFINING AND UNDERSTANDING FX RISK
CHART 1 – WHAT PERCENTAGE OF REVENUE COMES
FROM A FOREIGN-DENOMINATED CURRENCY?
0% 5% 10% 15% 20% 25%
None 25%
1-5% 18%
6-15%
13%
16-25% 10%
26-50% 9%
51-75% 8%
76-100% 17%
/8
DOING BUSINESS IN EMERGING MARKETS
For years, experts have urged companies to lessen their dependence on the giant U.S.
market next door and expand their reach to new markets. Today that often means
higher-growth, higher-risk emerging markets such as China and Mexico. Survey
respondents are playing the emerging market card in a major way: 42% said they are
currently conducting business in an emerging market. Oil and gas services company
Canadian Oilfeld Solutions Corp., having followed its customers across North America,
today fnds itself in Mexico and accumulating a growing corporate account of pesos.
“We have a huge Mexican exposure,” said Gordon Travis, Canadian Oilfeld’s CFO. “We’re
more or less addressing that on a country basis, as we’re there for the long term. For
transactions, we are reporting in U.S. dollars, which is something we conscientiously
decided to do a year and a half ago, because our focus is 100% U.S. and Mexico. As
it turned out under IFRS, that was a good decision. But the other issue is currency
transactions. We’re doing up to $10-15 million transactions, so we’re starting to look at
hedging the projects themselves.”
Companies are using a variety of strategies to manage their exposure to emerging
market currencies. The most popular strategy among survey respondents is the use of
a proxy currency such as the U.S. dollar, which was cited by 37% of respondents (see
Chart 2).
With emerging markets like Mexico, Poland, Eastern Europe, basic FX hedging can work there. I think where we have
the most challenges is in countries where there are controls on the currency. We started of doing non-deliverable
forwards to hedge our exposures. But the problem is that you don’t get to actually have these cash fows occur in the
local entity that is centered in this country. We’re now moving more and more towards onshore hedging, where we go
through the local FX market to hedge and are subject to all types of local government regulations and restrictions. In
certain situations, we have to literally account for every payment and every receipt with proper documentation so that
the local government will allow the funds to come in and out of the bank account.
Ali Jinnah – Director, Market Risk Management, Bombardier Inc.
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
“
”
/9
DOING BUSINESS IN EMERGING MARKETS
CHART 2 – HOW DO YOU MANAGE EXPOSURE
TO EMERGING MARKETS CURRENCIES?
0% 5% 10% 15% 20% 25% 30% 35% 40%
Other
Combination of a and b above
(please specify both emerging
market currency and proxy)
Deal directly in the currency
Products such as forward
contracts, non-deliverable
forward contracts, options
Use proxy e.g. USD, EUR, AUD 37%
22%
17%
15%
9%
One natural resources respondent said that a delicate balancing act can allow for a quasi-
hedging strategy. “TZS (Tanzanian shilling) and NAD (Namibian dollar) are emerging
market currencies. We try to balance our cash and receivables in emerging market
currencies so that they roughly equal our payables in emerging market currencies.
Sort of an unofcial hedge. Our proxy for larger contracts is USD, which is also a foreign
currency for us, but is unhedged.” Another respondent takes the “go local” approach
with “a combination of using local currency as a natural hedge, purchases and sales in
the local currency. Net exposure is then hedged using forwards.”
/10
FX RISK IN ACTION: WHO IS IN CHARGE?
HOW IS PERFORMANCE MEASURED?
Ensuring that foreign exchange risk is adequately accounted for in Canadian companies
is clearly the purview of the fnance department within organizations, based on
survey responses. More than half (54%) said that FX risks were the responsibility of the
CFO, followed by the VP Finance/Director of Finance (24%) and Treasurer (19%). The
remaining three respondents said the duty was handled by the CEO, a dual president/
CFO, and a treasury department consisting of a treasurer, two deputy treasurers and a
treasury manager.
While FX risk management in the end resides with one executive in an organization,
there is typically an oversight committee or board that will monitor compliance and
performance. Lida Sadrazodi, CFO of KUBRA, provides reports on the performance of the
privately owned communications management company at regular board meetings. “I
report on the currency gain or loss that we have had, comment and justify any hedging
or lack of it. I don’t normally have a specifc direction by the board that I have to cover
the FX risk, unless there are material movements in US$, given our specifc position. If I
have a specifc recommendation, based on the circumstances, I bring it up to the board
and get their approval. Otherwise I do what sounds prudent, given the risk tolerance
of company.”
Larger organizations with more extensive international operations can have elaborate
programs and policies to deal with the uncertainties of foreign currencies. What they do
not always do, however, is to shield individuals from responsibility for their decisions.
“GE has a very, very large and very active treasury department that fully hedges GE’s
overall foreign exchange exposure and also ofers a large number of products internally,
such as income hedging, position hedging, transactional hedging and so on. I can get it
all internally,” said Jim Fergusson, Vice-President of Finance, GE Railcar Services Canada.
“Once you get beyond that, it is the responsibility of the individual businesses and the
individual managers to hedge or not to hedge, to choose to take advantage of these
products, with the following backdrop, in terms of risk, we want to be able to forecast
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
/11
everything and have it be repeatable and consistent. There’s a lot of pressure to
ensure that you achieve those goals by hedging any foreign exchange exposure.”
Slightly more than one half (51%) of organizations participating in the survey have a
policy or formal process/procedure in place to FX manage risk. How those companies
measure their success in controlling FX risk varies widely. As one respondent explained:
“Margins are compared to budget, the goal of our FX hedging is to preserve the budgeted
margin, not to enhance margins. FX execution performance is measured relative to best
price available at time of execution.” Another survey respondent pointed to the all-too
real danger of viewing FX hedging as a potential proft-making exercise rather than one
of risk limitation. “We do not view the managing of FX risk as a proft center. We have
gone down that road but found that it incented risky behaviour. We spent a fair amount
of time defning the variables that defne our FX risk (a mix of accounting and economic
FX risks) and put fairly tight limits around the risk.”
Organizations establish FX hedging policies to achieve unique outcomes based
upon their real and perceived risks. The most common purpose according to survey
respondents is to guard against short-term exchange impact (41%) with regards to
sales or purchases in foreign currencies (see attached chart). “A bit of all of the above,”
explained one respondent. “We spent a fair amount of time trying to fnd a balance
between the accounting and economic impacts of FX risk.”
FX RISK IN ACTION: WHO IS IN CHARGE? HOW IS PERFORMANCE MEASURED?
We have a formal policy which results in regular feedback to the Board. However, we also have a Management Committee,
which includes the Chairman, the Vice-Chairman, President, COO, CFO, the SVPs that meets in the ofce every week. The result
is that certain members of our board are in the ofce almost every week. They’re very hands-on and knowledgeable about
key Treasury activities. There is a considerable level of understanding of the various markets risks the company faces, whether
it’s FX, interest rates, commodity prices or other business risks at the highest levels of the company.
John McCoshen – Director of Treasury, Canadian Natural Resources
“
”
/12
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
CHART 3 – COMPARISON BETWEEN SURVEY RESPONDENTS WITH
AND WITHOUT FORMAL FX RISK MANAGEMENT POLICIES
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Respondents with
no policy in place
Respondents
with formal FX risk
management
process or policy
Rated FX as
important or
extremely important
Track FX by
currency unit
80%
88%
55%
72%
5%
41%
43%
Conduct business
transactions in
emerging markets
Some interesting diferences can be observed between those organizations which
do have a policy and those who don’t. Not surprisingly, Chart 3 highlights that 80%
of respondents with an FX risk management policy say their organization rates FX as
important or extremely important. However, a relatively high number of respondents
– more than half – with no policy in place still say FX risk management is important or
extremely important at their organization. It was interesting to note that despite the
diferences in the level of importance assigned to FX between the two groups, both
groups had about the same proportion conducting business transactions in emerging
markets (41% and 43%, respectively).
/13
FX RISK IN ACTION: WHO IS IN CHARGE? HOW IS PERFORMANCE MEASURED?
0% 20% 40% 60% 80% 100%
Monte Carlo simulation
Sophisticated approaches
(including statistical procedures
and stress tests)
Sensitivity analysis
Simple scenario analyses
Translating foreign
currency balances
Aggregating actual or
forecasting transactions
in foreign currencies
Respondents without an FX policy Respondents with an FX policy
100%
68%
61%
26%
47%
25%
45%
25%
5%
2%
2%
3%
CHART 4 – DO YOU REGULARLY QUANTIFY FOREIGN
EXCHANGE RISK BY DOING ANY OF THE FOLLOWING?
Some diferences emerge when the two groups’ methods of quantifying risk are compared
(Chart 4). Those respondents with FX risk management policies and procedures are more
likely to engage in quantifcation activities such as simple scenario analyses, sensitivity
analyses, and aggregating actual or forecasting transactions in foreign currencies (100%
of those with FX policies versus only 25% of those without such policies). Those with
policies are slightly less likely to use simpler methods such as simply translating foreign
currency balances.
/14
At many organizations, FX risk management and hedging policies have grown more
sophisticated and international operations have expanded while currency concerns have
grown. Stephen Dyer, CFO of Agrium Inc., has seen the fertilizer maker’s strategy grow more
formalized and sophisticated as the company’s operations have spilled beyond Canada’s
borders. “We have a policy in place with our board that is more what you’re allowed to do, it
doesn’t dictate what you have to do. We also have a fnancial risk committee that’s looking
across all of our fnancial risks, including the FX component. It looks at what fnancial risks
are coming at us, what our strategy is and projects we have. It meets quarterly and reports
to our audit committee, and that committee also has operations updating them on what’s
going on with their business and what they see as their fnancial risks as well.”
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
CHART 5 – PURPOSE OF FX HEDGING POLICY
Other
Neutralize balance sheet impact on working
capital and long-term capital (including debt)
Give certainty to exchange rate impact
on purchasing and/or sales and short
term cash fows in home currenciesmpany).
Mitigate short-term exchange impact
(e.g. Six, 12 or 18 months) from sales or
purchases in foreign curriencies.
38%
19%
13%
30%
/15
“Having a board with the ultimate responsibility for risk management rather than just
the organization’s ofcers sounds realistic in theory, but only works in practice if directors
have some knowledge of foreign exchange risks and techniques and strategies to mitigate
them”, noted Gordon Travis, CFO of Canadian Oilfeld Solutions Corp. “Organizations’
biggest issues have been around the expertise to put accountability for risk on the board.
The issue usually is, do board members understand or have the time to understand what
they are now being mandated to address? I think there is actually a mandate for the board
to strategically know, understand and address foreign exchange risks.”
FX RISK IN ACTION: WHO IS IN CHARGE? HOW IS PERFORMANCE MEASURED?
CHART 6 – DECIDING FACTORS WHETHER OR NOT TO MANAGE FX EXPOSURE
0% 10% 20% 30% 40% 50%
Creditworthiness of fnancial institution/counterparty
(bank, credit union, FX boutique, etc.
Role of audit and/or fnance committees
FX as a proft centre
Access to credit to suppor a hedging program
Industry specifc practices
Accounting guidelines
Sufcient resources to manage a hedging program
Level of knowledge and access to advice
43%
42%
28%
23%
20%
17%
15%
13%
/16
In light of the international fnancial crisis of 2008-2009, an assessment of the strength
of organization’s key fnancial lenders may be an area of scrutiny. That is fast becoming
a standard reporting category for Bombardier Inc., said its Director of Financial Risk
Management, Ali Jinnah. “One thing we also report to senior management is our overall
counterparty exposure, including the marked-to-market position of our FX, interest
rates and commodity derivatives as well as any deposits we may have with a given
counterparty. We’ve also set risk limits per institution based on credit ratings and risk,
which we look at closely.”
For Canadian companies that regularly sell their goods and services internationally and
get paid in a foreign currency, a clear risk exists that by the time they are paid, exchange
rates will change and they will end up receiving less in Canadian dollars than when they
agreed to the deal in the frst place. Called transaction exposure, this type of FX risk is the
one that companies with foreign operations focus most on mitigating.
Survey respondents said that they utilize a variety of FX instruments to mitigate risk, the
most common being forward contracts, foreign exchange swaps and currency options
or a blend of the three. “Vanilla forward purchase FX contracts are the only thing we
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
We have what we call a risk management policy that was approved by the board
and is reviewed on a yearly basis. That risk management policy is fairly tight; it’s
mostly hedging 100% of FX risk. On the interest rate side we have a range of 60 %
to 100 % of fxed rate. Currently most of our debt is fxed and we see no incentive
to move to foating rate debt. We report on a quarterly basis what are the levels
and confrm to the board that we’re respecting the risk management policy.
Pierre van Gheluwe – Treasurer, Yellow Media Inc.
”
“
We don’t have a formal process in place. Any new relationship or instrument that
we’ve entered into is reviewed and approved at the board level before we embark on
a new tactic but its not a formally documented process. We don’t surprise anybody
with new ways of doing things until we’ve had some input from the entire board.
Bill Cummins – CFO of Petromanas Energy Inc.
”
“
use,” said one survey participant.
“Other more exotic options are
available to us, but we do not use
them.” Another survey respondent
said their frm’s strategy employs
“FX spot and forward exchange
contracts, FX swaps, foreign
currency borrowing and lending
for fxed terms.”
/17
FX RISK IN ACTION: WHO IS IN CHARGE? HOW IS PERFORMANCE MEASURED?
“The structure of the company, public or private, will also play a role in what mix of
FX risk mitigation products they use,” observed Mary Mulqueen. “A public company is
more likely to use a product that gets what we call hedge accounting treatment, so that
they don’t have volatility in their revenue every quarter based on marking their hedges
to market. In private companies, they may use a variety of structured products, which
are options based products that give them the certainty of a worst case price to protect
their margins or budgets while allowing for participation in a favourable market move.”
0% 10% 20% 30% 40% 50%
Other
Foreign exchange swaps
Currency options (vanilla options or structures)
Futures contracts (Exchange traded contracts that allow you to
buy or sell a currency at a set exchange rate in a given
month; can be closed out before settlement date)
Forwards (OTC agreements to buy or sell a given amount
of a currency at a set exchange rate on a specifc future date) 41%
23%
13%
8%
15%
CHART 7 – FINANCIAL INSTRUMENTS OR PRODUCTS USED TO MITIGATE RISK
/18
Interestingly, those organizations with a formal FX policy in place are far more likely to
use products such as forward contracts, non-deliverable forward contracts and options
(see Chart 8).
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
Combination of dealing in
currency and using proxy
Deal directly in the currency
Products such as forward
contracts, non-deliverable
forward contracts, options
Other
Respondents with an FX policy Respondents without an FX policy
Use proxy eg USD, EUR, AUD
35%
35%
39%
22%
22%
8%
9%
13%
9%
8%
CHART 8 – HOW DO YOU MANAGE EXPOSURE
TO EMERGING MARKETS CURRENCIES?
/19
CANADIAN DOLLAR: PARITY, BOON OR HINDRANCE?
CANADIAN DOLLAR: PARITY, BOON OR HINDRANCE?
The march to parity of the Canadian dollar with the U.S. greenback has made it more
difcult for some to compete internationally while on the other hand it has lowered the
cost to invest and upgrade foreign-sourced capital equipment.
Currency fuctuations are a two-edged sword for companies, however most organizations
surveyed said that currency fuctuations have not changed their competitiveness within
their industry. Three-quarters said they were unafected while the remainder reported
that changes in currency values have hurt their business. “In the aerospace business
segment, revenues are in USD while most of our costs are in CAD, the rising CAD has
made our competitive position more difcult,” said one respondent.
Many of those who reported a negative impact from currency fuctuations referenced
the rise of the Canadian dollar against the U.S. dollar and its negative impact on revenue.
U.S.-Canada parity has had other unwanted efects. “[It has] signifcantly reduced profts
and resulted in reduced reinvestment in the company to maintain our competitive
position,” reported one respondent, while another said currency changes have “lowered
profts in the foreign country and have attracted competitors to the domestic market.”
The dominance of the U.S. dollar in international trade is not always a negative in the
experience of Danielle Parent, VP of Finance Platform Products Group with Fujitsu
America. The Canadian unit of the Japanese ofce product maker found itself at a
disadvantage as its competitors’ products were priced in U.S. dollars while it priced its
product lines in Canadian dollars. “Our pricing people had trouble following the market
because the dollar was so volatile. So I worked closely with the sales and marketing
people and we decided that why not sell in U.S. dollars like our competitors, therefore
we don’t have to address our pricing in Canadian dollars on a daily basis to cope with
the volatility of the dollar. That has been a perfect edge for us. The product mix has
evolved over the years, however we still have a few lines of product that we sell in U.S.
dollars which is helping us create a natural hedge since products are purchased from
the factory in U.S. dollars. And when the GST came into play, that was a bonus for us,
because it sort of made the spread even bigger.”
/20
CONCLUSION
Foreign exchange risk management: Perspectives from fnancial executives shows that
Canadian companies are embracing the need to expand their businesses beyond our
borders and deal with whatever currency risks that come with that strategy.
Companies need to see rewards as well as the risks with foreign exchange. As the participants
in the Executive Research Forum and survey respondents highlighted, Canadian businesses
are tackling the issues around foreign currencies with increasing sophistication. ”FX in the
form of foreign currency transactions, i.e. payables and receivables, is an integral part of
more and more Canadian businesses today,” said Mary Mulqueen. “As a result, FX is getting
a much higher profle, whether it be from the news media or just internally, as businesses
have to rely on global connections to survive and thrive. The focus on emerging markets
like Latin America and Asia has opened up new opportunities for Canada as these
countries seek natural resources for industrial and infrastructure development. Foreign
exchange can materially impact businesses’ competitive advantage or put them at a real
disadvantage if they aren’t aware of their risks or don’t handle them efectively because
that impact goes directly to the bottom line.”
The research shows that foreign exchange risk management is taken seriously. In most
cases, it is the direct responsibility of senior fnancial executives who report the results
of their policies and programs to the entire board of directors or to a board committee.
Managing foreign currency risk is only going to grow more complicated in the future
as Canadian business strive to lessen their dependence on traditional U.S. markets and
set their sights on developing markets such as those in Asia, South America or Africa.
Even mature markets such as Europe present heightened complexity and risk, given the
serious sovereign debt and currency issues in the European Union.
Businesses have taken a very serious approach to FX risk programs such as hedging.
Rather than consider hedging as a potential proft centre, hedges are created as
defensive foreign currency “insurance policies” to guard against short-term currency
shifts or long term threats to corporate capital.
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
/21
CONCLUSION
Foreign exchange risk management needs to be part of a Canadian company’s
international growth strategy. As only half of the organizations surveyed have a
policy, formal process or procedure in place to manage FX risk, others should follow
their example. A close examination of practices of those who have FX policies shows
that having such a policy in place is associated with placing a greater importance on
FX risk management in the organization, employing more sophisticated methods of
quantifying risk, and a higher likelihood of using products such as options and forward
contracts. Further study of organizations’ best practices in FX risk management would
shed more light on the efectiveness of their strategies and tactics.
/22
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
APPENDIX A: DEMOGRAPHICS
Other
Not-for-proft organization
Government agency
Publicly traded company (including a
subsidiary of a public company)
Privately-held company
2%
8%
37%
50%
3%
POSITION TITLE
Controller
VP Finance
Chief Financial Ofcer
Finance Director
Treasurer
Other
Owner/Founder
4%
6%
10%
6%
15%
42%
17%
CORPORATE STRUCTURE
$1 billion or more
$500 - $999 million
$100 - $499 million
$50 - $99 million
Less than $50 million
40%
13%
22%
8%
17%
ANNUAL REVENUE
/23
APPENDIX A: DEMOGRAPHICS
INDUSTRY CLASSIFICATION
0% 5% 10% 15% 20%
Other
Management of companies and enterprises
Arts, entertainment and recreation
Telecommunications
Health care and social assistance
Construction
Other services (except public administration)
Retail trade
Transportation and warehousing
Agriculture, forestry, fshing and hunting
Utilities
Wholesale trade
Finance and insurance
Professional, scientifc and technical services
Manufacturing
Mining, quarrying, and oil and gas extraction 18%
14%
10%
9%
8%
6%
5%
5%
5%
4%
4%
3%
3%
3%
2%
1%
/24
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
APPENDIX B: FORUM PARTICIPANTS
Forum Chair: Michael Conway – Chief Executive & National President, FEI Canada
Moderators: Christian Bellavance – VP, Research & Communications, FEI Canada
Mary Mulqueen – Managing Director, Foreign Exchange Sales, CIBC
Calgary Bill Cummins – CFO, Petromanas Energy Inc.
Participants: Stephen Dyer – EVP & CFO, Agrium Inc.
Jim Fergusson – VP Finance, GE Railcar Services Canada
Chris LeBlanc – Executive Director, Foreign Exchange Sales, CIBC
Dean Leskowski – Manager, Treasury and Risk Management, Calfrac Well Services Ltd.
John McCoshen – Manager, Treasury, Canadian Natural Resources Limited
Grant McNeil– VP Finance, Ian Murray & Company
Jerry Pratt – Executive Director, Foreign Exchange Sales, CIBC
Bill Ross – VP, Finance, Enbridge Pipelines
Gordon Travis – CFO, Canadian Oilfeld Solutions Corp.
Craig Werbicki – Director, Commercial Banking Calgary, CIBC
Toronto Jonathan Burkhead – Director, Treasury Operations, OpenText Corporation
Participants: Hanif Ladha – VP Financial Planning and Operations Support, G4S Cash Services (Canada) Ltd.
Allan MacDougall – Global Director of Finance, Dumas Contracting Ltd.
Don Mikolich – Executive Director, Corporate Solutions, CIBC
Danielle Parent – VP, Finance & Administration, Fujitsu Canada, Inc.
Derek Petridis – VP, Finance, Shikatani Lacroix Design Inc.
Lida Sadrazodi – CFO, KUBRA
Montreal Andrew Antoniadis – Associate VP, CIBC Commercial Banking, Quebec Region
Participants: Ali Jinnah – Director, Market Risk Management, Bombardier Inc.
Jessica Lawson – Director, Foreign Exchange Sales, CIBC
Pierre Van Gheluwe – Treasurer, Yellow Media Inc.
Observers: Paul Brent – Writer, Donohue Brent Training and Consulting
Melissa Gibson – Communications & Research Manager, FEI Canada
Floor
USD/CAD Cap
/25
APPENDIX C: GLOSSARY
APPENDIX C: GLOSSARY
Indicative terms & conditions:
• Client position: Sell USD / Buy CAD forward
• Expiry date: 1 month
• Strike: 1.0205 CAD per USD
• Notional: US$ 10,000,000
• C$ 10,205,000
• Premium: none
Indicative terms & conditions:
• Client position: Sell USD / Buy CAD Forward
• Expiry date: 1 month
• Cap: 1.0475 CAD per USD
• Floor: 1.0000 CAD per USD
• Notional: US$ 10,000,000
• Premium: none
Example of FX collar – USD seller
• A collar (also known as a risk reversal) provides a client with
a protected rate and a best case rate for a given date in the
future.
• Client participates fully in movements between the protected
rate (foor) and best case rate (cap).
• Cap and foor are typically selected so there is no upfront
premium.
Example of outright forward – USD seller
• Allows a client to lock-in a foreign exchange rate at which
they can sell on a given date in the future.
• As such, all uncertainty associated with foreign exchange
movements will be nullifed.
• However, the client will not be able to beneft from a
favourable move in the spot market.
• Valid hedging instrument for “certain” cash fows.
USD/CAD seller
USD/CAD seller
Spot ref.: 1.0200 CAD per USD
1-month forward ref: 1.0205 CAD per USD
Spot ref.: 1.0200 CAD per USD
Strike
USD/CAD
Analysis:
• Full protection against USD depreciation below the foor
• Full participation between the foor and cap
• No participation in USD appreciation above the cap
• No upfront premium
/26
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
Indicative terms & conditions:
• Client position: Buy USD / Sell CAD forward
• Expiry date: 1 month
• Strike: 1.0260 CAD per USD
• Notional: US$ 10,000,000, if above strike
• US$ 5,000,000, if below strike
• Premium: none
Analysis:
• Full protection against an appreciation of the USD
• Partial participation in a depreciation of the USD
• Higher strike compared to an outright forward
Indicative terms & conditions:
• Client position: Buy USD / Sell CAD forward
• Expiry date: 3 months
• Strike: 1.0275 CAD per USD
• Conditional trigger: 1.0045 CAD per USD
• Notional: US$ 10,000,000
Analysis:
• Full protection against an appreciation of the USD
• Full participation in a potential depreciation of the
USD down to the conditional trigger
• Zero upfront premium
• Initial give up of 50 pips relative to the outright
forward for a potential 180 pips participation
• Hedge accounting friendly
Example of at-maturity variable rate forward – USD buyer
• Designed to ofer clients protection at a known worst case
rate while providing the client with the ability to participate
in a potential favourable move in spot to the pre-determined
conditional trigger.
• Only if spot USD/CAD is below the conditional trigger at
maturity, will the client be required to buy USD/CAD at the
pre-agreed strike rate.
• Tradeof for client is agreeing to a slightly higher Strike upfront
compared to the outright forward in exchange for the potential to
participate in favourable move in spot to the conditional trigger.
Example of participating forward – USD buyer
• Allows a client to lock-in a foreign exchange rate at which
they can buy on a given date in the future.
• Amount of USD the client has the right to buy exceeds the
amount of USD the client is obligated to buy.
• Strike is higher than an outright forward in exchange for
potential to beneft from a favourable move in the spot
market on part of the notional.
USD/CAD buyer
USD/CAD buyer
If spot fxes below Conditional
Trigger, client buys USD/CAD
at the Strike rate
3-month forward ref: 1.0225 CAD per USD
Spot ref.: 1.0200 CAD per USD
1-month forward ref: 1.0205 CAD per USD
Spot ref.: 1.0200 CAD per USD
Strike USD/CAD
Conditional Trigger
Strike USD/CAD
/27
APPENDIX C: GLOSSARY
DEFINITIONS:
Spot transaction: Single outright transaction involving the exchange of two
currencies at a rate agreed on the date of the contract for value or delivery
(cash settlement) within two business days.
Outright forward: Transaction involving the exchange of two currencies at a
rate agreed on the date of the contract for value or delivery (cash settlement) at
some time in the future (more than two business days later). This category also
includes non-deliverable forwards and other forward contracts for diferences.
Foreign exchange swap: Transaction which involves the actual exchange of
two currencies (principal amount only) on a specifc date at a rate agreed at the
time of the conclusion of the contract (the short leg), and a reverse exchange
of the same two currencies at a date further in the future at a rate (generally
diferent from the rate applied to the short leg) agreed at the time of the
contract (the long leg).
Non-deliverable forward: A cash-settled, short-term forward contract on a
thinly traded or non-convertible foreign currency, where the proft or loss at the
time at the settlement date is calculated by taking the diference between the
agreed upon exchange rate and the spot rate at the time of settlement, for an
agreed upon notional amount of funds.
Currency option: Option contract that gives the right to buy or sell a currency
with another currency at a specifed exchange rate during a specifed period.
This category also includes exotic currency options such as average rate
options and barrier options.
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
THE CANADIAN FINANCIAL EXECUTIVES RESEARCH FOUNDATION (CFERF) is the
non-proft research institute of FEI Canada. The foundation’s mandate is to advance the
profession and practices of fnancial management through research. CFERF undertakes
objective research projects relevant to the needs of FEI Canada’s 1,800 members in
working toward the advancement of corporate efciency in Canada. Further information
can be found at www.feicanada.org.
FINANCIAL EXECUTIVES INTERNATIONAL CANADA (FEI CANADA) is the all industry
professional membership association for senior fnancial executives. With eleven
chapters across Canada and 1,800 members, FEI Canada provides professional
development, thought leadership and advocacy services to its members. The association
membership, which consists of Chief Financial Ofcers, Audit Committee Directors and
senior executives in the Finance, Controller, Treasury and Taxation functions, represents
a signifcant number of Canada’s leading and most infuential corporations. Further
information can be found at www.feicanada.org.
CIBC is a leading Canadian-based fnancial institution serving 11 million clients in
Canada and around the world. Through CIBC Commercial Banking, we ofer a unique
client experience to mid size businesses, with fexible business solutions, dedicated
business expertise, and timely business advice that helps our clients succeed. More
than 400 CIBC Commercial Banking relationship managers from coast to coast meet
the needs of business owners and executives at over 20,000 companies in 75 sectors.
We have the expertise to deliver integrated fnancial solutions that are right for our
clients and address their business needs at every stage of their company’s development
and operation. Further information can be found at www.cibc.com.
/28
CANADIAN FINANCIAL EXECUTIVES RESEARCH FOUNDATION
CORPORATE DONORS:
GOLD ($10,000 +):
Husky Energy Inc.
Bell Canada
SILVER ($5,000-10,000):
Agrium Inc.
CGI Group Inc.
Imperial Oil Ltd.
BRONZE ($1,000-5,000):
Canadian Western Bank Group
Open Text Corporation
PotashCorp
FEI CANADA’S RESEARCH TEAM:
Michael Conway – Chief Executive & National President
Christian Bellavance – Vice President, Research & Communications
Laura Bobak – Senior Writer
Melissa Gibson – Communications & Research Manager
Paul Brent – Writer
/29
170 University Avenue, Suite 1201
Toronto, ON M5H 3B3
T 416.366.3007
F 416.336.3008
www.feicanada.org
doc_561645166.pdf
It is a common refrain in business today that the international strength of the Canadian dollar, best illustrated by parity with the U.S. dollar today after flirting with 60-cent territory a decade ago, is a competitive disadvantage to a trading nation such as ours. It is clearly not a fatal disadvantage, given the international reach of many of our leading companies.
FOREIGN EXCHANGE RISK
MANAGEMENT: PERSPECTIVES
FROM FINANCIAL EXECUTIVES
ACKNOWLEDGEMENTS
We gratefully acknowledge the eforts of our survey respondents and our forum
participants who took valuable time away from their day jobs to participate in
this work. We are particularly grateful to our research partner, CIBC, without
whom this study would not have been possible.
Christian Bellavance
Vice President, Research and Communications
Financial Executives International Canada
Copyright 2013 by Canadian Financial Executives Research Foundation (CFERF).
No part of this publication may be reproduced, stored in a retrieval system or transmitted
in any form or by any means, electronic, mechanical, photocopying, recording or
otherwise, without the prior permission of the publisher.
This report is designed to provide accurate information on the general subject
matter covered. This publication is provided with the understanding that the author
and publisher shall have no liability for any errors, inaccuracies, or omissions of this
publication and, by this publication, the author and publisher are not engaged in
rendering consulting advice or other professional service to the recipient with regard
to any specifc matter. In the event that consulting or other expert assistance is required
with regard to any specifc matter, the services of qualifed professionals should be
sought.
First published in 2013 by CFERF.
1201-170 University Ave.
Toronto, ON
M5H 3B3
ISBN# 978-1-927568-06-4
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
CONTENTS
Executive summary / 2
Methodology and demographics / 4
Defning and understanding FX risk / 5
Doing business in emerging markets / 8
FX risk in action: Who is in charge? How is performance measured? / 10
Canadian dollar parity: Boon or hindrance / 19
Conclusion / 20
Appendix A: Demographics / 22
Appendix B: Forum participants / 24
Appendix C: Glossary / 25
/2
EXECUTIVE SUMMARY
It is a common refrain in business today that the international strength of the Canadian
dollar, best illustrated by parity with the U.S. dollar today after firting with 60-cent
territory a decade ago, is a competitive disadvantage to a trading nation such as ours. It
is clearly not a fatal disadvantage, given the international reach of many of our leading
companies. For most organizations, foreign exchange risk – and its management –
are challenges for which there exists an emerging and ever-more sophisticated set of
policies, procedures and tools.
Canadian businesses continue to adapt to an increasingly complex currency universe.
They cannot predict with any certainty the future value of the euro, Japanese yen or
even the U.S. dollar, but they can and do mitigate the risk of currency fuctuations with
proactive business practices supplemented with products such as swaps, futures and
options backed by well-thought out policies designed to ensure that they are not taking
on too much risk.
What is clear according to this study by the Canadian Financial Executives Research
Foundation (CFERF) is that foreign exchange risk is a major issue. In fact, 90% of
organizations surveyed rated foreign exchange management as an important
consideration in their business. However, just over one half of organizations participating
in the survey have a policy or formal process/procedure in place to FX manage risk.
This would suggest that some organizations could beneft from a more structured
approach to managing their FX risk.
Canada’s status as a trading nation has created a generation of fnancial executives who
are keen currency watchers. Illustrating the critical role currency fuctuations can play
with regard to revenue and proft, four out of fve respondents (80%) said that they track
foreign exchange by currency unit, either manually or with an automatic feed.
Managing foreign currency risk is no longer simply a case of guarding against changes
in the respective dollars of the U.S. and Canada. A surprising 42% of Canadian fnancial
executives surveyed said that they are now doing business in fast-growing emerging
markets, where currencies can be volatile or under strict government controls.
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
/3
Responsibility for managing FX risk generally lies near the top of Canadian businesses.
In the majority of cases the CFO, VP of Finance or Treasurer has direct responsibility for
controlling FX risk and many of those executives report directly to a board committee
charged with monitoring the business’ foreign exchange exposure.
Canadian companies take a “do no harm” approach to FX risk management, borne out
by the stated goals of their FX hedging programs. Hedges are not created as speculative
bets with the hope or expectation of windfall gains out of currency fuctuations, but
are created instead to protect against short-term changes in exchange rates, provide
certainty for purchases and/or sales and short-term cash fows in home currencies or
neutralize the balance sheet impact on working capital and long term capital.
Organizations employ a sophisticated range of processes to mitigate exchange rate
impacts, such as diversifying their foreign currency holdings, adjusting selling prices in
response to exchange rate volatility, borrowing in foreign currencies and limiting longer
term contractual arrangements to lessen the impact of currency fuctuations.
Canadian businesses understand the risks that come with failing to insure against
possible foreign exchange shifts. Those include the potential for lower revenue and
profts, loss of market competitiveness, the potential for higher interest costs and
debt levels in a foreign market and the uncertainty that comes with controlled or
managed currencies.
Currency fuctuations are a serious concern for one in four of the survey respondents.
Negative efects range from a loss of competitiveness in a foreign market to shrinking
proft and sales to a reduction in reinvestment in the parent company.
Most fnancial executives have come to grips with changing international fnancial
regulations, based on responses to the survey. Nearly one half now use IFRS (International
Financial Reporting Standards) and are considering the implications of Basel III with
respect to foreign exchange. “We expect higher credit charges for longer tenor hedging
and a contraction of credit availability from our counterparties,” said one respondent.
EXECUTIVE SUMMARY
/4
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
Canadian companies also managed the high volatility of foreign currencies versus the
U.S. dollar in the time after the collapse of Lehman Bros., one of the events that triggered
the international fnancial crisis. “Since 2008, we have increased hedge ratios, shortened
hedge tenors and spread out the rollover time frames to avoid large maturities in a
specifc month,” explained one survey participant.
Foreign exchange risk management should be a component of a Canadian company’s
international growth strategy, but slightly more than one half of the organizations
surveyed have a policy, formal process or procedure in place to manage FX risk.
If Canadian companies are going to continue to grow – and play a larger role on the
international business stage – they must be able to utilize an expanding set of tools and
policies designed to manage, minimize and even prosper from foreign exchange risks.
The following pages provide valuable insight for companies seeking to establish their
own policies and procedures to deal with the risks of selling and buying products in
foreign markets and with operating in foreign currencies.
METHODOLOGY AND DEMOGRAPHICS
The Foreign exchange risk management: Perspectives from fnancial executives report is
based on the results of an online survey that took place between November 26, 2012
and January 3, 2013, during which time 109 respondents completed the survey. These
results were expanded with insights gathered during an executive research forum that
included participants in Montreal, Toronto and Calgary on November 28, 2012. Of the
survey respondents, 50% worked for private companies and 37% for public companies.
42% of respondents were CFOs while 15% held the title of VP Finance. Four out of 10
(40%) represented companies with revenue of less than $50 million. See Appendix A for
more details on demographics.
/5
DEFINING AND UNDERSTANDING FX RISK
DEFINING AND UNDERSTANDING FX RISK
Foreign exchange risk management: Perspectives from fnancial executives seeks to
discover how organizations defne and understand foreign exchange (FX) risk, and
what policies, procedures and fnancial instruments they utilize to manage the risk of
currency fuctuations.
Given the international nature of business today and Canada’s status as a trading
nation, foreign exchange is of increasing concern to most businesses today. Three
out of four respondents in the study reported that some percentage of their revenue
is denominated in a foreign currency and 17% reported that 76% to 100% of their
revenue is denominated in a foreign currency. One small marketing company, which
does most of its business in the U.S., looks upon the upward climb of the Canadian
dollar with dread. “We would rather have a 60-cent Canadian dollar,” said the VP Finance
of the company. “We primarily have U.S. net cash coming in and then all of our operating
needs are Canadian-dollar denominated.”
Ali Jinnah, Director of Financial Risk Management with Bombardier Inc., deals with
currency complexity on a daily basis as a result of the transportation giant’s geographically
dispersed manufacturing operations. “In our European rail operations, we have production
facilities in 60 diferent countries, leaving us with large scale FX exposures in a multitude of
currency pairs, both from a cost perspective and from the revenue side. On the aerospace
side, revenues are primarily in U.S. dollars, while our production facilities are in Canada,
Mexico and the U.K., resulting in a diverse mix of FX exposures for our cost base. To top
that all of, at the consolidated level we report in U.S. dollars.”
Export credit agency Export Development Canada noted in a recent foreign exchange
white paper that Canadian companies that are active in international markets view
volatility in the Canadian dollar as the number one constraint to growing exports. The
CFERF foreign exchange risk management study similarly found that organizations
consider the management of FX risk to be a critical task. More than two-thirds of
respondents (68%) rated foreign exchange management “extremely important” or
“important.” Just 10% rated FX management “not at all important.” However, only about
half actually had a policy or procedure in place to manage risk.
/6
FX risk can negatively afect cash fow and proftability both in the short and long
term. Changes of more than 5% in the value of the Canadian dollar relative to the U.S.
dollar are commonplace over any typical 60-day period. Viewed over the longer term,
the Canadian dollar has broken out of a narrow, stable trading band with the U.S. that
prevailed from 1994 until 2007. The fnancial crisis of 2008 resulted in three years of
extreme currency volatility, and risk. “The swings in the U.S.-Canada currencies became
very extreme,” said Mary Mulqueen, Managing Director of Foreign Exchange Sales with
CIBC. “So companies that aren’t addressing risk management would have experienced
that in a major way and would be feeling it now. 78% of our exports are still to the
U.S. and even for those companies that are expanding into Asia, most of their trade
is denominated in U.S. dollars. We expect that to change and evolve over time, but
currently the U.S. dollar is the key counterparty currency for Canada.”
Of the organizations that monitor currency risk, the majority track it the old-fashioned
way by manually entering currency values, with only a small minority utilizing an
automatic feed. “All our sales and the majority of payables are in USD,” said one
respondent. “A separate USD account is maintained. Profts are drawn from this account
and converted to CDN when benefcial.”
Virtually all organizations participating in the survey had some amount of payables
denominated in a foreign currency. Nearly three quarters (73%) had 1-50% of payables in
a foreign currency while 23% had more than half of their payables in foreign currencies.
“Mostly we deal in foreign countries, so Latin America, South America, Western Africa,
Mongolia,” said Allan MacDougall, Global Finance Director of mining contractor Dumas
Contracting Ltd. “We pay most of our costs in the local currency and most of our contracts
are in U.S. dollars.”
Our company raised a signifcant amount of debt in the U.S., more than was actually
needed to fund our operations and our capital requirements down there. As a result, we
loaned a portion of those funds to our Canadian parent. The issue with that is then we
ended up with a U.S. dollar liability in Canada that had to be revalued and translated back
into Canadian dollars at the end of every month. So ultimately, this created a signifcant
amount of P&L volatility in our consolidated fnancial statements.
Dean Leskowski – Manager of Treasury and Risk Management, Calfrac Well Services
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
“
”
/7
DEFINING AND UNDERSTANDING FX RISK
CHART 1 – WHAT PERCENTAGE OF REVENUE COMES
FROM A FOREIGN-DENOMINATED CURRENCY?
0% 5% 10% 15% 20% 25%
None 25%
1-5% 18%
6-15%
13%
16-25% 10%
26-50% 9%
51-75% 8%
76-100% 17%
/8
DOING BUSINESS IN EMERGING MARKETS
For years, experts have urged companies to lessen their dependence on the giant U.S.
market next door and expand their reach to new markets. Today that often means
higher-growth, higher-risk emerging markets such as China and Mexico. Survey
respondents are playing the emerging market card in a major way: 42% said they are
currently conducting business in an emerging market. Oil and gas services company
Canadian Oilfeld Solutions Corp., having followed its customers across North America,
today fnds itself in Mexico and accumulating a growing corporate account of pesos.
“We have a huge Mexican exposure,” said Gordon Travis, Canadian Oilfeld’s CFO. “We’re
more or less addressing that on a country basis, as we’re there for the long term. For
transactions, we are reporting in U.S. dollars, which is something we conscientiously
decided to do a year and a half ago, because our focus is 100% U.S. and Mexico. As
it turned out under IFRS, that was a good decision. But the other issue is currency
transactions. We’re doing up to $10-15 million transactions, so we’re starting to look at
hedging the projects themselves.”
Companies are using a variety of strategies to manage their exposure to emerging
market currencies. The most popular strategy among survey respondents is the use of
a proxy currency such as the U.S. dollar, which was cited by 37% of respondents (see
Chart 2).
With emerging markets like Mexico, Poland, Eastern Europe, basic FX hedging can work there. I think where we have
the most challenges is in countries where there are controls on the currency. We started of doing non-deliverable
forwards to hedge our exposures. But the problem is that you don’t get to actually have these cash fows occur in the
local entity that is centered in this country. We’re now moving more and more towards onshore hedging, where we go
through the local FX market to hedge and are subject to all types of local government regulations and restrictions. In
certain situations, we have to literally account for every payment and every receipt with proper documentation so that
the local government will allow the funds to come in and out of the bank account.
Ali Jinnah – Director, Market Risk Management, Bombardier Inc.
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
“
”
/9
DOING BUSINESS IN EMERGING MARKETS
CHART 2 – HOW DO YOU MANAGE EXPOSURE
TO EMERGING MARKETS CURRENCIES?
0% 5% 10% 15% 20% 25% 30% 35% 40%
Other
Combination of a and b above
(please specify both emerging
market currency and proxy)
Deal directly in the currency
Products such as forward
contracts, non-deliverable
forward contracts, options
Use proxy e.g. USD, EUR, AUD 37%
22%
17%
15%
9%
One natural resources respondent said that a delicate balancing act can allow for a quasi-
hedging strategy. “TZS (Tanzanian shilling) and NAD (Namibian dollar) are emerging
market currencies. We try to balance our cash and receivables in emerging market
currencies so that they roughly equal our payables in emerging market currencies.
Sort of an unofcial hedge. Our proxy for larger contracts is USD, which is also a foreign
currency for us, but is unhedged.” Another respondent takes the “go local” approach
with “a combination of using local currency as a natural hedge, purchases and sales in
the local currency. Net exposure is then hedged using forwards.”
/10
FX RISK IN ACTION: WHO IS IN CHARGE?
HOW IS PERFORMANCE MEASURED?
Ensuring that foreign exchange risk is adequately accounted for in Canadian companies
is clearly the purview of the fnance department within organizations, based on
survey responses. More than half (54%) said that FX risks were the responsibility of the
CFO, followed by the VP Finance/Director of Finance (24%) and Treasurer (19%). The
remaining three respondents said the duty was handled by the CEO, a dual president/
CFO, and a treasury department consisting of a treasurer, two deputy treasurers and a
treasury manager.
While FX risk management in the end resides with one executive in an organization,
there is typically an oversight committee or board that will monitor compliance and
performance. Lida Sadrazodi, CFO of KUBRA, provides reports on the performance of the
privately owned communications management company at regular board meetings. “I
report on the currency gain or loss that we have had, comment and justify any hedging
or lack of it. I don’t normally have a specifc direction by the board that I have to cover
the FX risk, unless there are material movements in US$, given our specifc position. If I
have a specifc recommendation, based on the circumstances, I bring it up to the board
and get their approval. Otherwise I do what sounds prudent, given the risk tolerance
of company.”
Larger organizations with more extensive international operations can have elaborate
programs and policies to deal with the uncertainties of foreign currencies. What they do
not always do, however, is to shield individuals from responsibility for their decisions.
“GE has a very, very large and very active treasury department that fully hedges GE’s
overall foreign exchange exposure and also ofers a large number of products internally,
such as income hedging, position hedging, transactional hedging and so on. I can get it
all internally,” said Jim Fergusson, Vice-President of Finance, GE Railcar Services Canada.
“Once you get beyond that, it is the responsibility of the individual businesses and the
individual managers to hedge or not to hedge, to choose to take advantage of these
products, with the following backdrop, in terms of risk, we want to be able to forecast
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
/11
everything and have it be repeatable and consistent. There’s a lot of pressure to
ensure that you achieve those goals by hedging any foreign exchange exposure.”
Slightly more than one half (51%) of organizations participating in the survey have a
policy or formal process/procedure in place to FX manage risk. How those companies
measure their success in controlling FX risk varies widely. As one respondent explained:
“Margins are compared to budget, the goal of our FX hedging is to preserve the budgeted
margin, not to enhance margins. FX execution performance is measured relative to best
price available at time of execution.” Another survey respondent pointed to the all-too
real danger of viewing FX hedging as a potential proft-making exercise rather than one
of risk limitation. “We do not view the managing of FX risk as a proft center. We have
gone down that road but found that it incented risky behaviour. We spent a fair amount
of time defning the variables that defne our FX risk (a mix of accounting and economic
FX risks) and put fairly tight limits around the risk.”
Organizations establish FX hedging policies to achieve unique outcomes based
upon their real and perceived risks. The most common purpose according to survey
respondents is to guard against short-term exchange impact (41%) with regards to
sales or purchases in foreign currencies (see attached chart). “A bit of all of the above,”
explained one respondent. “We spent a fair amount of time trying to fnd a balance
between the accounting and economic impacts of FX risk.”
FX RISK IN ACTION: WHO IS IN CHARGE? HOW IS PERFORMANCE MEASURED?
We have a formal policy which results in regular feedback to the Board. However, we also have a Management Committee,
which includes the Chairman, the Vice-Chairman, President, COO, CFO, the SVPs that meets in the ofce every week. The result
is that certain members of our board are in the ofce almost every week. They’re very hands-on and knowledgeable about
key Treasury activities. There is a considerable level of understanding of the various markets risks the company faces, whether
it’s FX, interest rates, commodity prices or other business risks at the highest levels of the company.
John McCoshen – Director of Treasury, Canadian Natural Resources
“
”
/12
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
CHART 3 – COMPARISON BETWEEN SURVEY RESPONDENTS WITH
AND WITHOUT FORMAL FX RISK MANAGEMENT POLICIES
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Respondents with
no policy in place
Respondents
with formal FX risk
management
process or policy
Rated FX as
important or
extremely important
Track FX by
currency unit
80%
88%
55%
72%
5%
41%
43%
Conduct business
transactions in
emerging markets
Some interesting diferences can be observed between those organizations which
do have a policy and those who don’t. Not surprisingly, Chart 3 highlights that 80%
of respondents with an FX risk management policy say their organization rates FX as
important or extremely important. However, a relatively high number of respondents
– more than half – with no policy in place still say FX risk management is important or
extremely important at their organization. It was interesting to note that despite the
diferences in the level of importance assigned to FX between the two groups, both
groups had about the same proportion conducting business transactions in emerging
markets (41% and 43%, respectively).
/13
FX RISK IN ACTION: WHO IS IN CHARGE? HOW IS PERFORMANCE MEASURED?
0% 20% 40% 60% 80% 100%
Monte Carlo simulation
Sophisticated approaches
(including statistical procedures
and stress tests)
Sensitivity analysis
Simple scenario analyses
Translating foreign
currency balances
Aggregating actual or
forecasting transactions
in foreign currencies
Respondents without an FX policy Respondents with an FX policy
100%
68%
61%
26%
47%
25%
45%
25%
5%
2%
2%
3%
CHART 4 – DO YOU REGULARLY QUANTIFY FOREIGN
EXCHANGE RISK BY DOING ANY OF THE FOLLOWING?
Some diferences emerge when the two groups’ methods of quantifying risk are compared
(Chart 4). Those respondents with FX risk management policies and procedures are more
likely to engage in quantifcation activities such as simple scenario analyses, sensitivity
analyses, and aggregating actual or forecasting transactions in foreign currencies (100%
of those with FX policies versus only 25% of those without such policies). Those with
policies are slightly less likely to use simpler methods such as simply translating foreign
currency balances.
/14
At many organizations, FX risk management and hedging policies have grown more
sophisticated and international operations have expanded while currency concerns have
grown. Stephen Dyer, CFO of Agrium Inc., has seen the fertilizer maker’s strategy grow more
formalized and sophisticated as the company’s operations have spilled beyond Canada’s
borders. “We have a policy in place with our board that is more what you’re allowed to do, it
doesn’t dictate what you have to do. We also have a fnancial risk committee that’s looking
across all of our fnancial risks, including the FX component. It looks at what fnancial risks
are coming at us, what our strategy is and projects we have. It meets quarterly and reports
to our audit committee, and that committee also has operations updating them on what’s
going on with their business and what they see as their fnancial risks as well.”
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
CHART 5 – PURPOSE OF FX HEDGING POLICY
Other
Neutralize balance sheet impact on working
capital and long-term capital (including debt)
Give certainty to exchange rate impact
on purchasing and/or sales and short
term cash fows in home currenciesmpany).
Mitigate short-term exchange impact
(e.g. Six, 12 or 18 months) from sales or
purchases in foreign curriencies.
38%
19%
13%
30%
/15
“Having a board with the ultimate responsibility for risk management rather than just
the organization’s ofcers sounds realistic in theory, but only works in practice if directors
have some knowledge of foreign exchange risks and techniques and strategies to mitigate
them”, noted Gordon Travis, CFO of Canadian Oilfeld Solutions Corp. “Organizations’
biggest issues have been around the expertise to put accountability for risk on the board.
The issue usually is, do board members understand or have the time to understand what
they are now being mandated to address? I think there is actually a mandate for the board
to strategically know, understand and address foreign exchange risks.”
FX RISK IN ACTION: WHO IS IN CHARGE? HOW IS PERFORMANCE MEASURED?
CHART 6 – DECIDING FACTORS WHETHER OR NOT TO MANAGE FX EXPOSURE
0% 10% 20% 30% 40% 50%
Creditworthiness of fnancial institution/counterparty
(bank, credit union, FX boutique, etc.
Role of audit and/or fnance committees
FX as a proft centre
Access to credit to suppor a hedging program
Industry specifc practices
Accounting guidelines
Sufcient resources to manage a hedging program
Level of knowledge and access to advice
43%
42%
28%
23%
20%
17%
15%
13%
/16
In light of the international fnancial crisis of 2008-2009, an assessment of the strength
of organization’s key fnancial lenders may be an area of scrutiny. That is fast becoming
a standard reporting category for Bombardier Inc., said its Director of Financial Risk
Management, Ali Jinnah. “One thing we also report to senior management is our overall
counterparty exposure, including the marked-to-market position of our FX, interest
rates and commodity derivatives as well as any deposits we may have with a given
counterparty. We’ve also set risk limits per institution based on credit ratings and risk,
which we look at closely.”
For Canadian companies that regularly sell their goods and services internationally and
get paid in a foreign currency, a clear risk exists that by the time they are paid, exchange
rates will change and they will end up receiving less in Canadian dollars than when they
agreed to the deal in the frst place. Called transaction exposure, this type of FX risk is the
one that companies with foreign operations focus most on mitigating.
Survey respondents said that they utilize a variety of FX instruments to mitigate risk, the
most common being forward contracts, foreign exchange swaps and currency options
or a blend of the three. “Vanilla forward purchase FX contracts are the only thing we
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
We have what we call a risk management policy that was approved by the board
and is reviewed on a yearly basis. That risk management policy is fairly tight; it’s
mostly hedging 100% of FX risk. On the interest rate side we have a range of 60 %
to 100 % of fxed rate. Currently most of our debt is fxed and we see no incentive
to move to foating rate debt. We report on a quarterly basis what are the levels
and confrm to the board that we’re respecting the risk management policy.
Pierre van Gheluwe – Treasurer, Yellow Media Inc.
”
“
We don’t have a formal process in place. Any new relationship or instrument that
we’ve entered into is reviewed and approved at the board level before we embark on
a new tactic but its not a formally documented process. We don’t surprise anybody
with new ways of doing things until we’ve had some input from the entire board.
Bill Cummins – CFO of Petromanas Energy Inc.
”
“
use,” said one survey participant.
“Other more exotic options are
available to us, but we do not use
them.” Another survey respondent
said their frm’s strategy employs
“FX spot and forward exchange
contracts, FX swaps, foreign
currency borrowing and lending
for fxed terms.”
/17
FX RISK IN ACTION: WHO IS IN CHARGE? HOW IS PERFORMANCE MEASURED?
“The structure of the company, public or private, will also play a role in what mix of
FX risk mitigation products they use,” observed Mary Mulqueen. “A public company is
more likely to use a product that gets what we call hedge accounting treatment, so that
they don’t have volatility in their revenue every quarter based on marking their hedges
to market. In private companies, they may use a variety of structured products, which
are options based products that give them the certainty of a worst case price to protect
their margins or budgets while allowing for participation in a favourable market move.”
0% 10% 20% 30% 40% 50%
Other
Foreign exchange swaps
Currency options (vanilla options or structures)
Futures contracts (Exchange traded contracts that allow you to
buy or sell a currency at a set exchange rate in a given
month; can be closed out before settlement date)
Forwards (OTC agreements to buy or sell a given amount
of a currency at a set exchange rate on a specifc future date) 41%
23%
13%
8%
15%
CHART 7 – FINANCIAL INSTRUMENTS OR PRODUCTS USED TO MITIGATE RISK
/18
Interestingly, those organizations with a formal FX policy in place are far more likely to
use products such as forward contracts, non-deliverable forward contracts and options
(see Chart 8).
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
Combination of dealing in
currency and using proxy
Deal directly in the currency
Products such as forward
contracts, non-deliverable
forward contracts, options
Other
Respondents with an FX policy Respondents without an FX policy
Use proxy eg USD, EUR, AUD
35%
35%
39%
22%
22%
8%
9%
13%
9%
8%
CHART 8 – HOW DO YOU MANAGE EXPOSURE
TO EMERGING MARKETS CURRENCIES?
/19
CANADIAN DOLLAR: PARITY, BOON OR HINDRANCE?
CANADIAN DOLLAR: PARITY, BOON OR HINDRANCE?
The march to parity of the Canadian dollar with the U.S. greenback has made it more
difcult for some to compete internationally while on the other hand it has lowered the
cost to invest and upgrade foreign-sourced capital equipment.
Currency fuctuations are a two-edged sword for companies, however most organizations
surveyed said that currency fuctuations have not changed their competitiveness within
their industry. Three-quarters said they were unafected while the remainder reported
that changes in currency values have hurt their business. “In the aerospace business
segment, revenues are in USD while most of our costs are in CAD, the rising CAD has
made our competitive position more difcult,” said one respondent.
Many of those who reported a negative impact from currency fuctuations referenced
the rise of the Canadian dollar against the U.S. dollar and its negative impact on revenue.
U.S.-Canada parity has had other unwanted efects. “[It has] signifcantly reduced profts
and resulted in reduced reinvestment in the company to maintain our competitive
position,” reported one respondent, while another said currency changes have “lowered
profts in the foreign country and have attracted competitors to the domestic market.”
The dominance of the U.S. dollar in international trade is not always a negative in the
experience of Danielle Parent, VP of Finance Platform Products Group with Fujitsu
America. The Canadian unit of the Japanese ofce product maker found itself at a
disadvantage as its competitors’ products were priced in U.S. dollars while it priced its
product lines in Canadian dollars. “Our pricing people had trouble following the market
because the dollar was so volatile. So I worked closely with the sales and marketing
people and we decided that why not sell in U.S. dollars like our competitors, therefore
we don’t have to address our pricing in Canadian dollars on a daily basis to cope with
the volatility of the dollar. That has been a perfect edge for us. The product mix has
evolved over the years, however we still have a few lines of product that we sell in U.S.
dollars which is helping us create a natural hedge since products are purchased from
the factory in U.S. dollars. And when the GST came into play, that was a bonus for us,
because it sort of made the spread even bigger.”
/20
CONCLUSION
Foreign exchange risk management: Perspectives from fnancial executives shows that
Canadian companies are embracing the need to expand their businesses beyond our
borders and deal with whatever currency risks that come with that strategy.
Companies need to see rewards as well as the risks with foreign exchange. As the participants
in the Executive Research Forum and survey respondents highlighted, Canadian businesses
are tackling the issues around foreign currencies with increasing sophistication. ”FX in the
form of foreign currency transactions, i.e. payables and receivables, is an integral part of
more and more Canadian businesses today,” said Mary Mulqueen. “As a result, FX is getting
a much higher profle, whether it be from the news media or just internally, as businesses
have to rely on global connections to survive and thrive. The focus on emerging markets
like Latin America and Asia has opened up new opportunities for Canada as these
countries seek natural resources for industrial and infrastructure development. Foreign
exchange can materially impact businesses’ competitive advantage or put them at a real
disadvantage if they aren’t aware of their risks or don’t handle them efectively because
that impact goes directly to the bottom line.”
The research shows that foreign exchange risk management is taken seriously. In most
cases, it is the direct responsibility of senior fnancial executives who report the results
of their policies and programs to the entire board of directors or to a board committee.
Managing foreign currency risk is only going to grow more complicated in the future
as Canadian business strive to lessen their dependence on traditional U.S. markets and
set their sights on developing markets such as those in Asia, South America or Africa.
Even mature markets such as Europe present heightened complexity and risk, given the
serious sovereign debt and currency issues in the European Union.
Businesses have taken a very serious approach to FX risk programs such as hedging.
Rather than consider hedging as a potential proft centre, hedges are created as
defensive foreign currency “insurance policies” to guard against short-term currency
shifts or long term threats to corporate capital.
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
/21
CONCLUSION
Foreign exchange risk management needs to be part of a Canadian company’s
international growth strategy. As only half of the organizations surveyed have a
policy, formal process or procedure in place to manage FX risk, others should follow
their example. A close examination of practices of those who have FX policies shows
that having such a policy in place is associated with placing a greater importance on
FX risk management in the organization, employing more sophisticated methods of
quantifying risk, and a higher likelihood of using products such as options and forward
contracts. Further study of organizations’ best practices in FX risk management would
shed more light on the efectiveness of their strategies and tactics.
/22
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
APPENDIX A: DEMOGRAPHICS
Other
Not-for-proft organization
Government agency
Publicly traded company (including a
subsidiary of a public company)
Privately-held company
2%
8%
37%
50%
3%
POSITION TITLE
Controller
VP Finance
Chief Financial Ofcer
Finance Director
Treasurer
Other
Owner/Founder
4%
6%
10%
6%
15%
42%
17%
CORPORATE STRUCTURE
$1 billion or more
$500 - $999 million
$100 - $499 million
$50 - $99 million
Less than $50 million
40%
13%
22%
8%
17%
ANNUAL REVENUE
/23
APPENDIX A: DEMOGRAPHICS
INDUSTRY CLASSIFICATION
0% 5% 10% 15% 20%
Other
Management of companies and enterprises
Arts, entertainment and recreation
Telecommunications
Health care and social assistance
Construction
Other services (except public administration)
Retail trade
Transportation and warehousing
Agriculture, forestry, fshing and hunting
Utilities
Wholesale trade
Finance and insurance
Professional, scientifc and technical services
Manufacturing
Mining, quarrying, and oil and gas extraction 18%
14%
10%
9%
8%
6%
5%
5%
5%
4%
4%
3%
3%
3%
2%
1%
/24
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
APPENDIX B: FORUM PARTICIPANTS
Forum Chair: Michael Conway – Chief Executive & National President, FEI Canada
Moderators: Christian Bellavance – VP, Research & Communications, FEI Canada
Mary Mulqueen – Managing Director, Foreign Exchange Sales, CIBC
Calgary Bill Cummins – CFO, Petromanas Energy Inc.
Participants: Stephen Dyer – EVP & CFO, Agrium Inc.
Jim Fergusson – VP Finance, GE Railcar Services Canada
Chris LeBlanc – Executive Director, Foreign Exchange Sales, CIBC
Dean Leskowski – Manager, Treasury and Risk Management, Calfrac Well Services Ltd.
John McCoshen – Manager, Treasury, Canadian Natural Resources Limited
Grant McNeil– VP Finance, Ian Murray & Company
Jerry Pratt – Executive Director, Foreign Exchange Sales, CIBC
Bill Ross – VP, Finance, Enbridge Pipelines
Gordon Travis – CFO, Canadian Oilfeld Solutions Corp.
Craig Werbicki – Director, Commercial Banking Calgary, CIBC
Toronto Jonathan Burkhead – Director, Treasury Operations, OpenText Corporation
Participants: Hanif Ladha – VP Financial Planning and Operations Support, G4S Cash Services (Canada) Ltd.
Allan MacDougall – Global Director of Finance, Dumas Contracting Ltd.
Don Mikolich – Executive Director, Corporate Solutions, CIBC
Danielle Parent – VP, Finance & Administration, Fujitsu Canada, Inc.
Derek Petridis – VP, Finance, Shikatani Lacroix Design Inc.
Lida Sadrazodi – CFO, KUBRA
Montreal Andrew Antoniadis – Associate VP, CIBC Commercial Banking, Quebec Region
Participants: Ali Jinnah – Director, Market Risk Management, Bombardier Inc.
Jessica Lawson – Director, Foreign Exchange Sales, CIBC
Pierre Van Gheluwe – Treasurer, Yellow Media Inc.
Observers: Paul Brent – Writer, Donohue Brent Training and Consulting
Melissa Gibson – Communications & Research Manager, FEI Canada
Floor
USD/CAD Cap
/25
APPENDIX C: GLOSSARY
APPENDIX C: GLOSSARY
Indicative terms & conditions:
• Client position: Sell USD / Buy CAD forward
• Expiry date: 1 month
• Strike: 1.0205 CAD per USD
• Notional: US$ 10,000,000
• C$ 10,205,000
• Premium: none
Indicative terms & conditions:
• Client position: Sell USD / Buy CAD Forward
• Expiry date: 1 month
• Cap: 1.0475 CAD per USD
• Floor: 1.0000 CAD per USD
• Notional: US$ 10,000,000
• Premium: none
Example of FX collar – USD seller
• A collar (also known as a risk reversal) provides a client with
a protected rate and a best case rate for a given date in the
future.
• Client participates fully in movements between the protected
rate (foor) and best case rate (cap).
• Cap and foor are typically selected so there is no upfront
premium.
Example of outright forward – USD seller
• Allows a client to lock-in a foreign exchange rate at which
they can sell on a given date in the future.
• As such, all uncertainty associated with foreign exchange
movements will be nullifed.
• However, the client will not be able to beneft from a
favourable move in the spot market.
• Valid hedging instrument for “certain” cash fows.
USD/CAD seller
USD/CAD seller
Spot ref.: 1.0200 CAD per USD
1-month forward ref: 1.0205 CAD per USD
Spot ref.: 1.0200 CAD per USD
Strike
USD/CAD
Analysis:
• Full protection against USD depreciation below the foor
• Full participation between the foor and cap
• No participation in USD appreciation above the cap
• No upfront premium
/26
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
Indicative terms & conditions:
• Client position: Buy USD / Sell CAD forward
• Expiry date: 1 month
• Strike: 1.0260 CAD per USD
• Notional: US$ 10,000,000, if above strike
• US$ 5,000,000, if below strike
• Premium: none
Analysis:
• Full protection against an appreciation of the USD
• Partial participation in a depreciation of the USD
• Higher strike compared to an outright forward
Indicative terms & conditions:
• Client position: Buy USD / Sell CAD forward
• Expiry date: 3 months
• Strike: 1.0275 CAD per USD
• Conditional trigger: 1.0045 CAD per USD
• Notional: US$ 10,000,000
Analysis:
• Full protection against an appreciation of the USD
• Full participation in a potential depreciation of the
USD down to the conditional trigger
• Zero upfront premium
• Initial give up of 50 pips relative to the outright
forward for a potential 180 pips participation
• Hedge accounting friendly
Example of at-maturity variable rate forward – USD buyer
• Designed to ofer clients protection at a known worst case
rate while providing the client with the ability to participate
in a potential favourable move in spot to the pre-determined
conditional trigger.
• Only if spot USD/CAD is below the conditional trigger at
maturity, will the client be required to buy USD/CAD at the
pre-agreed strike rate.
• Tradeof for client is agreeing to a slightly higher Strike upfront
compared to the outright forward in exchange for the potential to
participate in favourable move in spot to the conditional trigger.
Example of participating forward – USD buyer
• Allows a client to lock-in a foreign exchange rate at which
they can buy on a given date in the future.
• Amount of USD the client has the right to buy exceeds the
amount of USD the client is obligated to buy.
• Strike is higher than an outright forward in exchange for
potential to beneft from a favourable move in the spot
market on part of the notional.
USD/CAD buyer
USD/CAD buyer
If spot fxes below Conditional
Trigger, client buys USD/CAD
at the Strike rate
3-month forward ref: 1.0225 CAD per USD
Spot ref.: 1.0200 CAD per USD
1-month forward ref: 1.0205 CAD per USD
Spot ref.: 1.0200 CAD per USD
Strike USD/CAD
Conditional Trigger
Strike USD/CAD
/27
APPENDIX C: GLOSSARY
DEFINITIONS:
Spot transaction: Single outright transaction involving the exchange of two
currencies at a rate agreed on the date of the contract for value or delivery
(cash settlement) within two business days.
Outright forward: Transaction involving the exchange of two currencies at a
rate agreed on the date of the contract for value or delivery (cash settlement) at
some time in the future (more than two business days later). This category also
includes non-deliverable forwards and other forward contracts for diferences.
Foreign exchange swap: Transaction which involves the actual exchange of
two currencies (principal amount only) on a specifc date at a rate agreed at the
time of the conclusion of the contract (the short leg), and a reverse exchange
of the same two currencies at a date further in the future at a rate (generally
diferent from the rate applied to the short leg) agreed at the time of the
contract (the long leg).
Non-deliverable forward: A cash-settled, short-term forward contract on a
thinly traded or non-convertible foreign currency, where the proft or loss at the
time at the settlement date is calculated by taking the diference between the
agreed upon exchange rate and the spot rate at the time of settlement, for an
agreed upon notional amount of funds.
Currency option: Option contract that gives the right to buy or sell a currency
with another currency at a specifed exchange rate during a specifed period.
This category also includes exotic currency options such as average rate
options and barrier options.
FOREIGN EXCHANGE RISK MANAGEMENT: PERSPECTIVES FROM FINANCIAL EXECUTIVES
THE CANADIAN FINANCIAL EXECUTIVES RESEARCH FOUNDATION (CFERF) is the
non-proft research institute of FEI Canada. The foundation’s mandate is to advance the
profession and practices of fnancial management through research. CFERF undertakes
objective research projects relevant to the needs of FEI Canada’s 1,800 members in
working toward the advancement of corporate efciency in Canada. Further information
can be found at www.feicanada.org.
FINANCIAL EXECUTIVES INTERNATIONAL CANADA (FEI CANADA) is the all industry
professional membership association for senior fnancial executives. With eleven
chapters across Canada and 1,800 members, FEI Canada provides professional
development, thought leadership and advocacy services to its members. The association
membership, which consists of Chief Financial Ofcers, Audit Committee Directors and
senior executives in the Finance, Controller, Treasury and Taxation functions, represents
a signifcant number of Canada’s leading and most infuential corporations. Further
information can be found at www.feicanada.org.
CIBC is a leading Canadian-based fnancial institution serving 11 million clients in
Canada and around the world. Through CIBC Commercial Banking, we ofer a unique
client experience to mid size businesses, with fexible business solutions, dedicated
business expertise, and timely business advice that helps our clients succeed. More
than 400 CIBC Commercial Banking relationship managers from coast to coast meet
the needs of business owners and executives at over 20,000 companies in 75 sectors.
We have the expertise to deliver integrated fnancial solutions that are right for our
clients and address their business needs at every stage of their company’s development
and operation. Further information can be found at www.cibc.com.
/28
CANADIAN FINANCIAL EXECUTIVES RESEARCH FOUNDATION
CORPORATE DONORS:
GOLD ($10,000 +):
Husky Energy Inc.
Bell Canada
SILVER ($5,000-10,000):
Agrium Inc.
CGI Group Inc.
Imperial Oil Ltd.
BRONZE ($1,000-5,000):
Canadian Western Bank Group
Open Text Corporation
PotashCorp
FEI CANADA’S RESEARCH TEAM:
Michael Conway – Chief Executive & National President
Christian Bellavance – Vice President, Research & Communications
Laura Bobak – Senior Writer
Melissa Gibson – Communications & Research Manager
Paul Brent – Writer
/29
170 University Avenue, Suite 1201
Toronto, ON M5H 3B3
T 416.366.3007
F 416.336.3008
www.feicanada.org
doc_561645166.pdf