US Revenue? CIFFA M2M Webinar | Nov 9 2017 | Steve Kulchyk, EncoreFX - - PowerPoint PPT Presentation

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SMART FX:

How Are Canadian Freight Forwarders Protecting US Revenue?

CIFFA M2M Webinar | Nov 9 2017 | Steve Kulchyk, EncoreFX GTA

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SMART FX SERIES

Why Hedge? How are Other Freight Forwarders Managing their Risk?

AGEND A

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Market Update Recap of “Why Hedge?” 3 Freight Forwarders | 3 Different Approaches Pros & Cons Developing Your Own Approach

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MARKET UPDATE

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Three main factors affecting recent market fluctuations

CURRENCY MARKETS

Central Bank Policy Major Data Releases Politics

USD/CAD in 2017

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WHY HEDGE?

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2015

Average: 1.2765

Low: 1.1609 High: 1.3903

23 cents!

2016

Average: 1.3587

Low: 1.2485 High: 1.4689

22 cents!

2017

Average: 1.3352

Low: 1.2057 High: 1.3793

17 cents!

RECENT HISTORY OF USDCAD

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Year Average Rate

2012 0.9995 2013 1.0299 2014 1.1044 2015 1.2787 2016 1.3248

DON’T EXCHANGE RATES AVERAGE OUT?

USD/CAD

May 2017 – July 2017

12+ cent swing!

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BENEFITS OF HEDGING USD RECEIVABLES

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

For Canadian Freight Forwarders

$ $ $

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A TALE OF 3 FREIGHT FORWARDERS

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• 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

FX Situation

CASE STUDY ONE

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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

Chosen Approach

CASE STUDY ONE

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• 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

FX Situation

CASE STUDY TWO

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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

Chosen Approach

CASE STUDY TWO

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• Needs quotes to be competitive
• r 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

FX Situation

CASE STUDY THREE

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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

Chosen Approach

CASE STUDY THREE

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PROS & CONS

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CASE STUDY ONE

Pros Cons

• 100% confidence in the quoted

rate

• Profit margin is locked-in from

the get-go

• Exchange rates are smooth

and predictable over the year

• Perhaps not the most

competitive rate for the customer

• Requires established

relationships or long-term contracts

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CASE STUDY TWO

Pros Cons

• 100% open to market

fluctuation

• 100% open to market

fluctuation

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CASE STUDY THREE

Pros Cons

• Protects known revenue (not

projected revenue)

• Reduces need for FX buffer,

makes up-front quotes more competitive

• Margins are safe from an

adverse USD/CAD swing

• Can take advantage of a rise

in USD/CAD, to a point

• Participation on an upward

swing is limited

• Doesn’t entirely eliminate need

for FX buffer

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DEVELOPING YOUR APPROACH

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Analyze Business Operating Cycle & Identify FX Risk Quantify FX Risk Exposure Create FX Policy Hedge FX Risk

FX RISK MANAGEMENT PROCESS

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FX POLICY

A blueprint for a company’s FX risk management Risk tolerances Internal controls Performance measurement

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Identify the following:

DEVELOPING YOUR APPROACH

EXPOSURE CASHFLOW & MARGINS GOAL(S)

Budgeting for certainty? Protecting margins? Locking in profits?

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Match with your exposures and desired outcomes

FX PRODUCTS

Spot Forward Option

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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

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Steve Kulchyk

Senior FX Dealer | EncoreFX | GTA 289.497.9300 ext 1706 skulchyk@encorefx.com

QUESTIONS?

www.encorefx.com

Global Head Office 2nd Level, 517 Fort St. Victoria, BC V8W 1E7 P 1.844.363.7297| F 250.381.5028| E info@encorefx.com

The material in this presentation has been prepared by EncoreFX Inc. (Encore) and is intended as general background information current as at the date

• f 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

• r 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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