Article series – Part 1 of 2
Mike Smith, derivatives lawyer, Montreal, QC, CYBF mentor
Whether you plan to manufacture or sell internationally, exchange rates will be an important factor in the decisions you make. The world markets are liquid, flexible and highly complex, and what seems like good business today may not actually be when there is a 40-point swing in exchange rates. With respect to the Canada-US exchange, between 2002 and today, the Canadian dollar has swung about 40 cents. That’s a big change!
There are various strategies to protect your business from currency swings in the short, middle, and long-term. The option you choose will depend on the level of sophistication of your business, the size of the transaction, the size of your business (Sales), and your own investment knowledge. This article (part 1) focuses on contractual arrangement strategies which are best suited to smaller companies, and part 2 looks at derivative-related strategies which work for medium-to-large companies.
Though these aren’t official terms, common types of agreements include:
Derivatives offer other opportunities to manage foreign currency risk. To learn more, see Managing foreign currency exposure: Derivatives (part 2).
This is only a cursory overview of some of the hedging strategies you could take to protect your business. If you plan to use a hedging strategy, be sure to seek advice from an expert.