Analysis - Exporter

As an exporter, you are interested in the revenues, expressed in your currency, that your sales abroad will generate. Consequently, the exchange rate becomes a key issue, along with your sales price and the number of units sold.

At that point, several options are available to you. You can wait until a payment is received to convert, through a cash transaction, the foreign cash flow in the base currency. You must then be aware that, in case of an unfavorable market move, you support all the risks. The real cost associated with these risks will not be known until you proceed, at a later date, with the currency conversion. On the other hand, this approach gives you the possibility to benefit from a favorable market move.

On the opposite, you can cover the risks, as soon as they appear, through a future contract. Between these two extremes, numerous other approaches are to be considered. How do you establish which approach guaranties that your objectives will be met? To answer this question you should analyze and understand the nature of your business operations.

Schéma cycle d'exploitation

The exchange rate volatility creates a risk that is present throughout the operating cycle. Longer is this cycle, higher are the risks that an unfavorable market move could affect the profitability of your operations. However, one should not conclude that a relatively short operating cycle means that exchange risks are non-existent. Markets sometimes move unpredictably over a very short period of time.

The currency risk is constantly present

Take for instance, the situation of a Canadian exporter who sells products to American clients. Whether the Canadian Dollar rate of exchange exceeds the parity as in 2007, or reaches extremes such as those recorded at the beginning of 2000, the value in Canadian Dollars of the foreign cash flows vary along with the market fluctuations. The benefits expected from the export business are always at risk regardless of the currency relative strength or weakness.

The situation is the same on other markets where currencies such as the Euro, the Sterling Pound, the Swiss Franc, the Japanese Yen, the Australian Dollar, the Mexican Peso, the Brazilian Real, etc. remain highly volatile and unpredictable.

The following table illustrates that the currency market volatility is a recurrent phenomenon that threatens the profitability of your operations.

Exchange rate consequences (CAD/USD)
Margin target: 20%
PeriodExchange rate
(beginning of period)
Exchange rate
(end of period)
Targeted marginReal marginMargin fluctuation
July/Oct '030.71000.7700+8.5%20%10.6%-46.8% (4 months)
May/Nov '040.71000.8500+19.7%20%0.2%-98.8% (7 months)
May/Sept '050.78500.8900+13.4%20%5.8%-70.8% (5 months)
March/May '060.85500.9175+7.2%20%11.8%-40.9% (2 months)
Feb/July '070.84400.9670+14.6%20%4.7%-76.5% (5 months)
Oct/Nov '080.76840.8697+13.1%20%6.0%-70% (7 months)
Dec '08/Jan '090.76920.8499+10.4%20%8.5%-57.5% (1 month)

A potentially devastating leverage effect

This table highlights the major impact of currency fluctuations on profit margins. For instance, between July and October 2003, the 8.5% appreciation in the value of the Canadian dollar resulted in a deterioration of 46.8% of the expected margin. The rest of the table illustrates similar examples, all related to factual market moves. Over the years, the Canadian Dollar fluctuation has sometimes exceeded 20%! In this context, exporters should be aware of a potential decline in the revenues generated from their business abroad.