Currency Hedging Strategy: Managing Canadian Dollar Risk
Changes in the value of the Canadian dollar can significantly impact the profitability of the company and the evaluation of its operations abroad (import and/or export). currency hedging strategy allows companies to better anticipate these fluctuations and protect their margins.
Empower yourself to make informed decisions in a timely manner, based on facts and not emotions.
Foreign Exchange Risk Management Process and Currency Hedging Strategy
The absence of an appropriate currency hedging strategy, in line with the company’s strategy, can leave the company exposed to negative outcomes. A rigorous framework including a currency hedging strategy becomes essential to limit risks.
Importance of a Currency Hedging Strategy for Businesses
An effective policy is a framework that serves this business strategy and facilitates the achievement of its objectives. A currency hedging strategy helps identify key measures to objectively assess the impact of currency fluctuations on financial results.
Implementing a currency hedging policy allows for a better understanding (identification, measurement and monitoring) of the impacts of the variation in the value of the Canadian dollar on the various important financial variables (cash flows, asset values, EBITDA, debt clauses, etc.).
Determination of Key Financial Variables
Determining and monitoring these business-specific variables and the impact that currency variability can impose on them is essential to designing a risk management policy. This is how the policy ensures that business objectives are not compromised by currency movements.
Disciplinary Approach in Foreign Exchange Risk Management
The volatile nature of the foreign exchange market makes it important for companies to take a disciplined approach to managing foreign exchange risk. Prolonged periods of strong exchange rate movements occur frequently and contribute to significant variability in companies’ cash flows, balance sheets and profitability.
Risk Prioritization and Enterprise Capacity
Since it is both impractical and impossible to reduce currency volatility, it is necessary to prioritize risks and put in place a policy that matches the desired objectives, capacity and risk tolerance of the company while taking into account its budgetary constraint.
Adaptation of the Risk Management Policy
As the operating environment changes, the risk management policy must evolve to remain relevant to the specific needs of the business as this is how it helps to maximize owner/shareholder value. It is therefore clear that this policy cannot be the same for everyone and will be unique to each business.
Consequences of the Absence of a Management Policy
The absence of a policy leaves the company unprepared to handle and bear the effects of currency movements, potentially leading to increased costs, reduced market share and lower profit margins.
Benefits of a Tailor-made Management Policy
Implementing this process protects against adverse market movements while allowing optimal use of the company's operating cycle to be ready to capitalize on favorable currency movements.
For more information, please consult thefollowing article from BDC and refer to the following articles: Currency Hedging Strategy: Identifying Currency Riskand Currency Hedging Strategy: Navigating Market Uncertainty
International Markets: A World of Opportunities
Developing business abroad is a source of growth but carries risks for SMEs. The risk of currency fluctuations is one of the significant factors of success or failure internationally because it can quickly become complex to monitor the successive impacts of exchange rates on the anticipated performance of the company in order to support its profitability.
With D-Risk FX track the performance of each market and business line continuously while considering your hedging strategies.
Approach these markets with the security of a clear exchange rate risk management strategy and monitoring that matches your ambitions.