The sudden volatility in the Canadian dollar in recent years has resulted in large losses for Canadian importers who were unprepared. A sound hedging policy is important to manage foreign exchange risk regardless of market conditions. Canadian importers and exporters should establish robust risk identification, aggregation, and management policies to better handle FX exposure and reduce losses from unexpected currency movements.

1. Summary&Highlights
• The sudden bout of volatility has resulted
in large losses for Canadian importers
• The need for a sound hedging policy
irrespective of the external environment is
becoming ever so important.
• 2017 will be an opportune time for
Canadian importer and exporters to look
at how they manage FX and put in place
risk identification, aggregation and
management policies.
• Not hedging is speculation which is likely
to result in greater exposures an larger
losses.
• The establishment of a robust hedging
policy, setting up of a strong intra-company
risk reporting framework and proactive
management are the keys to managing
FX exposure.
The Importance of FX Risk Management
The sharp increase volatility in USD/CAD since late 2014 had caught several Canadian
importers by surprise after a few years of rather range bound activity in this currency pair.
The sharp move lower to beyond 1.45 in Q1 2016 and the equally fast reversal back to the
1.30 level, wrong footed several corporates again. One can say that Canadian importers were
not really at fault as the currency has traded in a rather narrow range of 1.1239 to 0.9739 for
a period of about 62 months from Q2 2009 to Q3 2014 with a standard deviation of 56 pips.
This period of low volatility was preceded by a period during the financial crisis in 2007 to
2009 when it traded in a volatile range with nearly twice the standard deviation of 97 bps.
In Q4 2014, the crude oil price fell sharply after OPEC resisted calls for a cut in production at
their November meeting.The steep fall in crude oil prices which constitutes about 20-25% of
Canadian exports resulted in a consequential fall in the Canadian Dollar.The surprise rate cut
from Bank of Canada in Jan 2015 added to volatility. In Q4 2014, the crude oil price fell sharp-
ly after OPEC resisted calls for a cut in production at their November meeting. The steep fall
in crude oil prices which constitutes about 20-25% of Canadian exports resulted in a conse-
quential fall in the Canadian Dollar. The surprise rate cut from Bank of Canada in Jan 2015
added to volatility.
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2. This sudden bout of volatility resulted in large losses for Cana-
dian importers and reinforced the need for a sound hedging
policy irrespective of the external environment. The lesson
learned from this sudden surge of volatility is that a sound and
structured program of FX hedging will not result in huge losses
during periods of excessive volatility, but at the same time not
hedging during periods of low volatility would not have
provided excessive returns.
This is an opportune time for Canadian importers and export-
ers to look at how they manage FX risk and put in place a
proper risk identification, aggregation and management
policy. In 2017 we have volatility emanating from crude oil
prices and change in US policies.
Risk Identification - is the starting point of the hedging
process and it is often said“well begun is half done.” The origi-
nation of FX exposures in a typical corporate occurs far away
from the confines of the corporate treasury department &
done at times with no inputs from this team. The CFO needs to
ensure that operations (including purchasing) & sales take
inputs from the Corporate Treasurer for pricing of input &
output. The onus is on the corporate treasury team to ensure
that proper reporting of foreign exchange denominated
purchases or sales are done in a timely manner. The corporate
treasury department needs to have a say in the pricing of these
imported or exported items so that the pricing is right given
the current and expected trend in exchange rates. This gives
the corporate treasurer early visibility of exposures and his
team can use their expertise to mitigate this exchange risk.
This is one of the weakest links in the risk management process
and it is not uncommon to hear the finance department say
that they just got hit by this payment request in a foreign
currency from a certain part of the organization. The key is to
establish strong lines of communication with the departments
within the company where the foreign exchange risk origi-
nates and have a structured system of transmitting this infor-
dealing.desk@mtfxgroup.comCA Dealing Desk: 1.800.832.5104 US Dealing Desk: 1.855.663.6839
mation to the corporate treasury department which will then
assume responsibility of managing the risk in this.
Risk Aggregation - Once the reporting of the FX Risk has
been conveyed, the responsibility of managing this falls on
the lap of the corporate treasurer, in smaller organizations the
CFO himself may oversee this, while the day to day manage-
ment is delegated to one of the senior finance professionals
within the company. The objective of centralized manage-
ment works well for diversified companies which operate
from multiple geographies and have offices and plants for
different product lines. The first step that the corporate
treasurer needs to undertake is to check whether there are
offsetting flows within the company that mitigate the risks.
Even when offsetting risks are present, there could be timing
mismatches that need to be managed. This can be done by
using holding accounts in foreign currencies. The corporate
treasurer could also discuss with the respective user depart-
ments possibilities of prepayments of commitments which
could result in cash discounts.
Risk Management -The objective of a corporate treasurer is
to mitigate the risk at the earliest moment and not to take
risks in the market.
Not hedging is speculation By not putting hedges in place,
the corporate treasurer will expose the company to market
risks which could result in big losses. There is never a good or
bad rate to hedge at. Hedging is the process of locking in costs
for imports or realized local currency amounts for exports. A
well-defined hedging policy takes out the emotional quotient
from the decision of when to hedge and makes this process
more structured, which will result in good long term risk man-
agement culture within the organization and will not be
hostage to the whims and fancies of people who run the
finance department from time to time.
Whether markets are volatile or placid it is a prudent practice
to hedge FX exposures as soon as they are crystallized and it

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can be done with a combination of Spot, Forwards & Holding
Accounts using a portfolio approach to hedging. The objec-
tive of such hedging is to ensure that the budget rate is
protected at all times. Once the Forex Risks have been elimi-
nated by establishing a robust hedging policy, excess man-
agement time will not be spent on tracking markets and that
will free up time for focusing on the core business. Hedging
gives management breathing time (as current & short term
business are protected) to adjust to changes that impact core
business in case of large FX movements.
Why MTFX?
It is important to keep the Hedging process simple and make
use of FX Spot & Forward contracts to hedge FX exposures.
We offer transparent pricing and you can place market orders
or watch levels which will be monitored in our systems. Our
dealers will proactively work with you to help achieve your
objective.
Our exchange rates are better than what any bank can offer as
this is the only business we do and being competitive on rates
has helped us sustain and grow since 1996. The use of forward
foreign exchange contracts also reduces the complexities
involved in hedge accounting, ensuring that management
time is not spent on complex calculations and discussions
with auditors regarding compliance to hedge accounting
norms. We offer quotes on over 100 currency pairs and our
state of art technology platform will integrate seamlessly into
your enterprise resource planning or in-house treasury
system. We offer multi-currency holding accounts which can
be used to park currencies for use as and when required. A
dedicated account management team at hand will focus on
implementation, training and support.
Summary & Conclusion:
The establishment of a robust hedging policy, setting up of
strong intra-company risk reporting framework and proactive
involvement of the corporate treasurer even before the
crystallization of the FX exposure will go a long way to build a
sustainable FX risk management framework.
Contact Us
Office Address
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Toll Free: 1.800.832.5104
Fax: 1.866.206.1740
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Markham, ON
Canada
L3R 0B6
U.S. Headquarters
Office Address
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Toll Free: 1.855.663.6839