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Episode 25 – Currency Hedging
Ian: Welcome to the Business Coach Podcast, an advice-oriented series that tackles the hot issues and opportunities facing Canada’s small businesses. I’m your host, Ian Portsmouth, the Editor of PROFIT Magazine and we’ve developed this podcast in cooperation with BMO Bank of Montreal.
While the rise of the loonie is well received by some companies and totally despised by others, there is one thing that they can all agree on concerning international currency markets, volatility is the enemy of everyone. There is a way you can minimize currency risks if you are an importer or exporter and that’s by hedging.
Here to explain the art of currency hedging is Ron Rylott, Director of Business Development for Foreign Exchange Products at BMO Capital Markets. Ron thanks for joining the Business Coach.
Ron: Happy to help.
Ian: So, big big big big question. What is hedging?
Ron: Truly it is just a way to help companies mitigate possible losses or mitigate the risk of the currency moving in an unfavorable direction.
Ian: Now, to a certain degree, it’s a little bit of guess work because you’re hedging your bet says they say but you could still be betting on the wrong side of the equation. So why should people consider hedging strategies?
Ron: Actually, I disagree with your premise. I think that doing nothing is probably more risky than bringing some certainty to what the future holds. Really hedging just becomes a matter of turning an unacceptable risk into an acceptable one.
Ian: Got it. So, when should a company adopt a currency hedging strategy?
Ron: Ideally, many companies sit down at the first of the year and they go through a budget and make the budget at a certain exchange rate for the upcoming year and that’s an ideal time to sit down and think about a hedging strategy if you will. So that they can then base their cost on a known exchange rate. So ideally it’s done at the first of the year or perhaps prior to signing a major contract that has a foreign exchange component to it.
Ian: And how popular is hedging as a foreign exchange management tool?
Ron: I think it is becoming more recognized and certainly this year with the volatility that we have seen in the Canadian dollar. Companies are realizing that they have to do something. To be quite honest, I don’t think companies do enough. I think there is a great deal more that they could or should be doing but it’s certainly a prominence today because, you know, it’s in the papers, it’s on the radio, given the strength of the dollar this year.
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