SMART FX: HEADING GOES HERE How Are Canadian Freight Forwarders Protecting US Revenue? CIFFA M2M Webinar | Nov 9 2017 | Steve Kulchyk, EncoreFX GTA
SMART FX SERIES How are Other Why Hedge? Freight Forwarders Managing their Risk? 2
AGEND A Market Update Recap of “Why Hedge?” 3 Freight Forwarders | 3 Different Approaches Pros & Cons Developing Your Own Approach 3
MARKET UPDATE 4
CURRENCY MARKETS Three main factors affecting recent market fluctuations Major Data Releases Central Bank Politics Policy 5
USD/CAD in 2017
WHY HEDGE? 7
RECENT HISTORY OF USDCAD 2016 2015 2017 Average: 1.3587 Average: Average: 1.3352 1.2765 Low: 1.1609 Low: 1.2057 High: 1.3793 High: 1.3903 Low: 1.2485 High: 1.4689 17 23 cents! 22 cents! cents! 8
DON’T EXCHANGE RATES AVERAGE OUT? Year Average Rate 2012 0.9995 2013 1.0299 2014 1.1044 2015 1.2787 2016 1.3248 9
12+ cent swing! USD/CAD May 2017 – July 2017
BENEFITS OF HEDGING USD RECEIVABLES For Canadian Freight Forwarders Budgeting purposes – have certainty on the $ exchange rate for your future conversions $ Protect your business from FX losses $ Guarantee the worth of your foreign revenue 11
A TALE OF 3 FREIGHT FORWARDERS 12
CASE STUDY ONE FX Situation • Established business • Runs on long-term contracts and extremely loyal customers • Quoting close to market USDCAD is not mandatory practice • Net USD to be converted (USD AR-USD AP) = $10 million/year 13
CASE STUDY ONE Chosen Approach GOAL: Make their rate of exchange predictable, smooth out exchange rate fluctuation over the year APPROACH: Build risk management plan around projections • Hedge 70% of projected sales on a monthly basis • Instruments used achieve protection of market rate at time of inception while the remaining ~30% is traded on the spot market when funds are received 14
CASE STUDY TWO FX Situation • Newer business, highly competitive • Quotes must be made according to current market or they risk losing business • 5% FX buffer on quotes; rate updated weekly for sales team • Net USD to be converted (USD AR-USD AP) = $40 million/year • AR: 60 days from booking/invoice 15
CASE STUDY TWO Chosen Approach GOAL: Don’t lose money APPROACH: Choose to “time the market” rather than employ risk management tools in order to avoid being “trapped in a hedge” • Converts USD receivables sporadically • Will usually wait in hopes for a better rate, though cashflow often dictates when exchange occurs • No protection from any downward swings in USD/CAD 16
CASE STUDY THREE FX Situation • Needs quotes to be competitive or risks losing business • 3% FX buffer on quotes; rate updated weekly for sales team • Net USD to be converted (USD AR-USD AP) = $20 million/year • AR: 60 days from booking/invoice 17
CASE STUDY THREE Chosen Approach GOAL: Protect profit margins APPROACH: Build risk management plan around actual sales • Use net USD sales from the previous week • Using a variety of hedging tools, protect these sales depending on where the rate is relative to their average rate booked • Achieve full protection of profit margins while also allowing for participation to some extent if USD/CAD increases 18
PROS & CONS 19
CASE STUDY ONE Pros Cons • 100% confidence in the quoted • Perhaps not the most rate competitive rate for the customer • Profit margin is locked-in from • Requires established the get-go relationships or long-term • Exchange rates are smooth contracts and predictable over the year 20
CASE STUDY TWO Pros Cons • 100% open to market • 100% open to market fluctuation fluctuation 21
CASE STUDY THREE Pros Cons • Protects known revenue (not • Participation on an upward projected revenue) swing is limited • Reduces need for FX buffer, • Doesn’t entirely eliminate need makes up-front quotes more for FX buffer competitive • Margins are safe from an adverse USD/CAD swing • Can take advantage of a rise in USD/CAD, to a point 22
DEVELOPING YOUR APPROACH 23
FX RISK MANAGEMENT PROCESS Analyze Business Quantify FX Risk Operating Cycle & Create FX Policy Hedge FX Risk Exposure Identify FX Risk 24
FX POLICY A blueprint for a company’s Risk Internal Performance FX risk tolerances controls measurement management 25
DEVELOPING YOUR APPROACH Identify the following: GOAL(S) Budgeting for CASHFLOW & EXPOSURE certainty? MARGINS Protecting margins? Locking in profits? 26
FX PRODUCTS Match with your exposures and desired outcomes Forward Option Spot 27
TO SUMMARIZE • FFs hedge, above all, to protect thin profit margins • FX approach should vary based on the unique circumstances of your business • By putting time in up front to develop an FX policy, you streamline all future decisions 28
QUESTIONS? Steve Kulchyk Senior FX Dealer | EncoreFX | GTA 289.497.9300 ext 1706 skulchyk@encorefx.com 29
Global Head Office 2 nd Level, 517 Fort St. Victoria, BC V8W 1E7 P 1.844.363.7297 | F 250.381.5028| E info@encorefx.com www.encorefx.com
THANK YOU The material in this presentation has been prepared by EncoreFX Inc. (Encore) and is intended as general background information current as at the date of this presentation. This information is given in summary form and does not purport to be complete. Information in this presentation should not be considered as advice or a recommendation to clients, potential clients, or their subsidiaries, in relation to holding, purchasing or selling foreign currencies or other financial products or instruments and does not take into account your particular FX objectives, financial situation, risk tolerance or needs. Before acting on any information you should consider the appropriateness of the information having regard to these matters, and you should seek customized advice.
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