HEADING GOES HERESMART FX:

How Are Canadian Freight

Forwarders Protecting

US Revenue?

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

2

SMART FX SERIES

Why Hedge?How are Other

Freight Forwarders Managing their Risk?

AGEND

A

3

Market Update

Recap of “Why Hedge?”

3 Freight Forwarders | 3 Different

Approaches

Pros & Cons

Developing Your Own Approach

4

MARKET UPDATE

5

Three main factors affecting recent market fluctuationsCURRENCY MARKETS

Central

Bank

Policy

Major Data

Releases

Politics

USD/CAD in 2017

7

WHY HEDGE?

8

2015Average:

1.2765

Low: 1.1609 High: 1.3903

23 cents!

2016Average: 1.3587

Low: 1.2485 High: 1.4689

22 cents!

2017Average: 1.3352

Low: 1.2057 High: 1.3793

17

cents!

RECENT HISTORY OF USDCAD

9

Year Average Rate2012 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!

11

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

$

$

$

12

A TALE OF 3

FREIGHT FORWARDERS

13

• 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 SituationCASE STUDY ONE

14

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 ApproachCASE STUDY ONE

15

• 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 SituationCASE STUDY TWO

16

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 ApproachCASE STUDY TWO

17

• Needs quotes to be competitive

or 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 SituationCASE STUDY THREE

18

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 ApproachCASE STUDY THREE

19

PROS & CONS

20

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

21

CASE STUDY TWO

Pros Cons

• 100% open to market

fluctuation• 100% open to market

fluctuation

22

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

23

DEVELOPING YOUR APPROACH

24

Analyze Business Operating Cycle & Identify FX Risk

Quantify FX Risk Exposure

Create FX Policy Hedge FX Risk

FX RISK MANAGEMENT PROCESS

25

FX POLICY

A blueprint for a company’s

FX risk management

Risk tolerances

Internal controls

Performance measurement

26

Identify the following:DEVELOPING YOUR APPROACH

EXPOSURECASHFLOW &

MARGINS

GOAL(S)Budgeting for

certainty?

Protecting margins?

Locking in profits?

27

Match with your exposures and desired outcomesFX PRODUCTS

Spot Forward Option

28

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

29

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

of 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

or 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.

THANK YOU