Managing Foreign Exchange Risk - Desjardins

International Service Centre Managing Foreign Exchange Risk As evidenced in recent years, the value of the Canadian dollar is unpredictable over time. The profitability of exporters and importers has taken a hit from the loonie’s fluctuations. However, the impact our dollar has on business profitability can be reduced by what is referred to as foreign exchange risk management. In fact, numerous trends are increasingly forcing Canadians to consider foreign exchange risk management, notably, globalization and market interdependence. The first should come as no surprise given that in the past, few companies had the opportunity to open their doors to the rest of the world. Today, a vast number of them are doing business internationally. Such is the case for many

SMEs, which are trying to leverage free trade between Canada, the U.S. and Mexico. Indeed, these SMEs are growing faster by selling goods and services abroad or by importing less costly raw materials and better quality parts. Consequently, since the early ‘90s, Canadian businesses have become more interested in international currency trading. The second trend, market interdependence, is due to the fact that currency markets can generate chain reactions that affect the value of the Canadian dollar. The perfect example is rising oil prices caused by widespread and excessive uncertainty and speculation about the U.S. dollar. Since Canada has little influence on the level of confidence of the main players on the international monetary market, it is therefore wise for Canadian companies to take control of foreign exchange risk. The purpose of this guide is to familiarize you with this risk and explain the various hedging options available to offset it. The Desjardins International Service Centre can help you develop strategies in this regard. The last section provides the contact information for the international services development managers in the different regions of Canada. Foreign exchange risk management Policy Knowledge of compliance available instruments Policy definition and implementation Caisse Centrale Desjardins is a member of SWIFT CCDQCAMM International Service Centre STEP 1: Defining your needs Based on the situation, you will have to determine whether you need to hedge and, if so, which instrument is the most appropriate. Answering the following questions may make it easier for you to decide: • In relation to sales, what percentage of your receivables and/or payables is in foreign currency? • How sensitive is your company to foreign exchange fluctuations, and at which point will the exchange rate affect your profitability? • Can you match the due dates of your receivables and payables in a given currency? • Are your export amounts and dates totally accurate? • Can you pass on a currency loss to your customers by increasing prices? • Do you have major investments to make in the short term (Do you need a stable cash flow?) or will you be making equipment or other purchases abroad in the short term? • Can you reach an agreement with your customers to share foreign exchange risk both in terms of losses and gains? Based on your answers to these questions, go to Step 2 to decide what is right for you. STEP 2: Hedging...

Website: www.desjardins.com | Filesize: 47kb
No of Page(s): 8
Download Managing Foreign Exchange Risk - Desjardins.pdf