The High Flying Supplier to Foreign Customers
A company services aircraft for foreign airlines at Canadian airports. They are continually invoicing foreign companies in their own currencies on 90-day terms of payment. The company's exposure to foreign exchange risk is both varied and substantial.

What should the company do?
Parts of this company's receivables portfolio are riskier than others, says Brian Glavin of Royal Bank's foreign exchange group. Specific risk is determined by the size of a receivable, the volatility of the currency involved and the time a receivable is outstanding. This company probably could not afford the cost to hedge every one of its receivables. Management should evaluate receivables on a risk basis, and consider hedging those they flag as high risk with no fee contracts, such as forwards.

Case Study 2

The Lucrative Foreign Contract
A Canadian company that manufactures electrical equipment has won a contract from a large multinational corporation based in the US. The terms of the contract stipulate the supplier must post a performance bond in US dollars, which it will forfeit if shipments are late, or quality is substandard. The size of the performance bond exposes the company to considerable foreign exchange risk.

What Should the Company Do?
Royal Bank foreign exchange specialist Andy Sinclair says, At first glance this situation seems to lend itself to a swap transaction because of the clearly defined term and the need to exchange back to Canadian dollars at maturity. However, the possibility exists that the bond could be forfeited. This may argue in favour of covering the initial currency conversion with an option contract, as this provides protection should anything go wrong.

Case Study 3

Competing for Global Talent
A Canadian professional sports team must pay its players in US dollars while it earns its revenue in Canadian dollars. While the amounts of its contracts with each player are fixed for at least the year, any reduction in the value of the Canadian dollar could cost hundreds of thousands if not millions of dollars. Exposure to foreign exchange risk could threaten the team's ability to attract and retain talent next year.

What Should the Company Do?
According to Mairi Dow of Royal Bank's foreign exchange group, player salary contracts are easy and practical to match with hedging vehicles. "In fact, I'd say the choice of vehicle is wider than the average situation. Since these contracts are rarely broken, I can't see the need for an option. In this business, there may be an opportunity to use a tunnel forward or a percent hedge forward (specialized variations of forward contracts). These instruments would provide the team a level of protection against foreign exchange risk at no cost while positioning itself to capitalize on favorable exchange rate movements. They could actually reduce the payroll."