What do a Canadian NHL® team, a baked goods exporter and a parts manufacturer have in common? While they operate in very different sectors – selling their products, buying supplies, or competing for ‘the Cup’ across borders – each of them is buffeted by shifting currency rates that can hurt their bottom line.
And, while our fluctuating dollar impacts every company doing business outside of Canada, few mid-sized businesses have a plan to manage their foreign exchange ‘FX’ risk. Fortunately, Scotiabank makes hedging strategies accessible to Commercial Banking clients, to manage their foreign exchange exposure while selling bread, making widgets or lacing their skates in distant markets.
Doing nothing is the real risk
“We often meet company owners who say, ‘You can’t beat fluctuating currency rates’, so they choose to do nothing,” “But by doing nothing, they are actually doing something, that is, inadvertently betting that rates will improve.”
“History tells us that rates can move significantly, and that can create an abrupt increase in the cost of a company’s foreign payables, reduce the value of their international sales, and batter their business margins,” points out Bridget Higgins, Director, Commercial FX & Derivative Products Group.
“For example, in 2020, with the U.S./Canadian dollar rate fluctuating between $1.27 and $1.45, a company with one million dollars in U.S. sales could have missed out on up to $180,000 in profits from currency exchange alone if they did not have an FX hedging program in place,” explains Higgins. Her team exclusively serves Commercial Banking customers from coast to coast, from Scotiabank’s Global Banking and Markets trading desks.
Follow a plan or fight every fire
It’s understandable that many companies push aside currency concerns, according to Morrison: “These companies are very good at what they do – whether that’s baking bread or making widgets – but currency markets can be overwhelming. They know that they can sell their product at a profit if the currency rate was fixed. However, they may not realize that a shift in currencies could seriously erode their margins.”
He notes that many mid-sized companies operate very efficiently, perhaps with a small treasury team or a company owner or CFO who ‘wears many hats’: “They are tremendously successful because they are great at cost control. However, the small management team must deal with ‘fires’ in operations, sales, etcetera. They may not notice the ‘fire’ in exchange rates until the dollar has moved 10 cents, and it’s too late. The reality is that this market can be vicious, and it can strike your business ‘pain points’ and keep you awake at night.”
Despite this reality, and the fact that so many Canadian companies do business across borders, only half of companies with currency exposure have a defined hedging strategy.
Noting that two-thirds of companies rely on economic forecasts to try to ‘time’ currency purchases, Morrison explains that, instead, a company should have a strategic discussion with a foreign exchange specialist: “We help our clients perform a budgeting and forecasting exercise, so they know what currency rate they need to remain profitable. No one can prevent the Canadian dollar from going up or down, but if you know your budget, we can find the best way to secure that currency rate for a period of time.”
“We work closely with each client to understand their goals,” says Higgins. “Once we know those parameters, we determine the right product, or combination of products. The solution might involve simple ‘spot trading,’ that is buying currency on the spot, or ‘forwards,’ which are derivatives that allow the client to buy or sell currency at a specific price at a future point in time.”
Since companies’ FX needs can vary greatly, Scotiabank provides a range of offerings, from full-service strategy and sales support by dedicated currency experts, to 24-hour, self-directed access to real-time trading and market rates in 30 major currencies via ScotiaRed, the Bank’s dynamic online trading platform.
"The foundation of a currency hedging strategy is working with the client to write a formal hedging policy. This is a piece of paper, just like the one a major corporation would have, that sets out if, when and how you would buy or sell currency and at what rate. It’s signed off by your company management, so it takes the emotion out of currency decisions when markets are moving.”
Demystifying FX hedging solutions
Morrison and Higgins say that they find it very rewarding to demystify capital markets products for clients: “When we meet with individual clients, or host FX hedging seminars across Canada, we break it down so that everything is digestible for busy leaders who are focused on their own business priorities.”
Morrison describes clients who successfully manage their foreign exchange risk, including several professional sports teams: “These organizations make their revenues in Canadian dollars from ticket sales and merchandise, but they must pay their biggest expense, player salaries, in U.S. dollars. It’s an important part of their business, and an element they can’t control, so we help them manage this risk.”
Higgins points to a major food manufacturer that sells its products in U.S. dollars. The company previously used basic ‘vanilla’ forwards contracts, to gain certainty of the exchange rate received for their sales. By introducing the client to a ‘boosted rate strategy’, Scotiabank helped them consistently outperform the standard rate by five cents on the dollar, resulting in sizable gains on multimillion-dollar annual sales.
“There’s an FX solution for everyone, whether it’s an outperformance strategy like this one, or a more vanilla structure with zero market risk and total peace of mind; ultimately it depends on their goals and comfort level.”
As awareness of currency risk grows, more companies are turning to Scotiabank’s FX Specialists, in light of the Bank’s commitment to serve mid-sized companies, with the same calibre of expertise and services availed to Fortune 500 firms. They can access the Bank’s entire breadth of services and resources, while working with a solid, dependable major financial institution that will be there in changing market and business conditions.
Reflecting on the way that currencies can “make or break” a business, Morrison offers reassuring words:
“You may think that currency rates are beyond your expertise, but we have the tools to help you stabilize these real costs. Just as you are the best at baking bread, making widgets or shooting goals, FX is our specialty, and we can help you gain control of this crucial part of your business.”