Foreign Exchange Facility Guarantee

As a Canadian company, if you sell goods and services internationally and get paid in a foreign currency, there’s a risk that exchange rates could change and you’ll receive less CAD than originally expected. The reverse holds true if you are purchasing products in a foreign currency, with the risk that you will have to pay more. Foreign exchange risk management is how you can get protection against exchange rate fluctuations.

1. Your cash flow is more predictable, even in volatile markets.
   
2. Your profit margins are safer.
3. Your sales are protected from foreign exchange risk.
4. You can budget costs and revenues more accurately.

You can manage FX risk by implementing a sound foreign exchange hedging strategy, which your financial institution or other FX provider can help you establish. Learn more with our free guide.

There are a variety of ways to approach FX hedging. Each company is unique, and you should analyze your hedging needs with your FX provider. Generally, however, hedging falls into two categories.

• Natural hedging: An exporter both buys and sells goods internationally, so that the exchange rate fluctuations offset each other, minimizing the difference between cash receipts and payments. For example, you could set up a foreign affiliate or subsidiary in a market, sell in the local currency and purchase supplies in that local market, therefore, paying in the local currency.
• Financial hedging:  An exporter buys foreign exchange hedging instruments through their FX provider. Some examples of these are forward contracts and options. All carry risk, so you need to work with your FX provider to determine the best fit for your company.

The cost of not hedging even partial FX exposure could outweigh the cost of the FX hedging product chosen for your situation. Hedging guidelines are based on company needs and may involve a cost to secure a specific rate using a specific currency derivative. It is a good idea to work with your FX provider to mitigate costs and have a forward looking perspective.