Research

RBC Capital Markets Global Research team delivers in-depth intelligence and keen insight across industry sectors, asset classes, operating disciplines and geographies to support and help guide our clients’ investment strategies. With more than 300 research professionals worldwide, our proprietary research and strategy coverage includes:

Economics
Rates
Investment Grade and High Yield Credit
Foreign Exchange

Equities
U.S. Municipals
Technical, Quantitative and Portfolio Strategy

Through RBC Insight, our clients have access to the timely, strategic advice of our analysts, strategists and economists, expressed through actionable recommendations, daily commentaries and thematic publications.

Access to RBC Insight is available only to institutional and corporate clients of RBC Capital Markets. RBC Insight is also accessible through logging into RBC DX. For more information, please contact your RBC Capital Markets representative.

Regulatory

We offer you access to information on Over-the-Counter Derivatives Reforms.

FX Risk Scenarios

At RBC Capital Markets, we ensure our clients receive the knowledge they need to make informed decisions. Currency exposure is a reality for companies who choose to do business in the international market. Foreign denominated assets, liabilities, receivables, payables, loans, leases and payrolls are all items which will change in value relative to the company's home currency. We can help you by building a customizable solution to meet your needs.

Foreign Exchange Risk is the possibility that an exposed currency will fluctuate in a way that is unfavourable for the company. The company may have to convert or account for the foreign currency under terms that are not as good as originally budgeted. Some points to consider:

Currency risk is a reality for many businesses.
Currency risk should not be an obstacle to international trade.
Currency fluctuations can be substantial.
Currency risk typically is created well before the time when the currencies are actually converted.

In general, most companies tend to be in one of two situations, long or short of a foreign currency. For example, Canadian based exporters of goods or services tend to be long foreign currencies, while Canadian based importers of goods or services tend to be short foreign currencies. Outlined below are both scenarios.

Example – Exporter

You receive US$100,000 per month from a 12 month contract selling goods to a U.S. customer.

Your budgeted rate is 1.0800;
you expect to receive C$108,000.

The spot rate is currently 1.0900 and the USD has been appreciating and you are optimistic that trend may continue, but do not want to risk losses if this view proved wrong.

Example – Importer

You need US$100,000 a month to buy raw materials for the next twelve months.

Your budgeted rate is 1.1000;
you expect to pay C$110,000.00

The spot rate is currently 1.0900, but the USD has been appreciating and you are concerned that this trend may continue above your budgeted rate of 1.1000 and this will erode your margins.

^{Case Study 1}
Long Foreign Currency – Canadian Manufacturer that exports to the U.S.

Background:

A Canadian manufacturer of high quality moulds and specialty dyes who is a direct supplier to a well-known U.S. based automotive manufacturer.

The Canadian manufacturers operating currency is CAD ; all overhead costs (labour, equipment, rent, inputs) are denominated in Canadian dollars; however the client invoices in USD and 100% of their revenues are denominated in USD. The production, sales contracts are long-term commitments commonly spanning 12 to 24 months. The U.S. automotive manufacture takes delivery of goods and pays for product in USD on an approximately monthly basis.

There is a minimum amount of CAD needed on a monthly basis. Canadian dollars are required for items such as payroll which is due on the 15th and 30th, as well as the monthly lease payment and other monthly expenses.

Concerns related to foreign exchange:

There is a risk that USD could depreciate relative to CAD. If this happens, it will take more USD for the client to cover their CAD operating expenses.
What is the breakeven point where depreciation of USD would cause the Canadian manufacturer to no longer be profitable?

The RBC Capital Markets Solution:

The RBC Capital Markets Middle Markets FX team can put together a tailored hedging solution for the Canadian Manufacturer to manage their currency exposure in the Case Study above.

^{Case Study 2}
Short Foreign Currency, Canadian based Produce packager, seller that imports from the U.S.

Background:

A Canadian importer, packager and re-seller of fresh produce operates a packaging facility in Canada where they sell to various buyers (grocery stores, food producers etc). During inclement months (September to June) fresh produce is imported from California.

The Canadian importer buys from growers, growers co-operatives in California. They pay for the imported produce in USD with 30 day payment terms. The importer than packages and sells domestically in Canada and are paid in CAD.

Concerns related to foreign exchange:

There is a risk that CAD could depreciate relative to USD. If this happens, it will take more CAD for the importer to buy produce from the United States.
What is the breakeven point where depreciation of CAD would cause the importer to no longer be profitable?

The RBC Capital Markets Solution:

The RBC Capital Markets Middle Markets FX team can put together a tailored hedging solution for the Canadian Importer to manage their currency exposure in the Case Study above.

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FAQs

Should I be hedging?

Changes in the value of a currency is a constant reality and these changes can occur unpredictably and can be substantial. Any client who wishes to eliminate the risk of an adverse currency move should consider hedging their currency exposure. Unhedged currency exposures put margin at risk. Contact us today to learn how we can help.

What should I hedge? How Much?

Firmly contracted FX currency payables and receivables are generally hedged at a higher percentage of exposure. Clients who have a defined history of FX usage will often hedge their anticipated exposures. For example, a Canadian based retailer with a U.S. based supplier, will often project U.S. purchases throughout the year and will often hedge at least a fraction of their anticipated requirements. For clients with uncertain exposure, it is not recommended to hedge with a product that will require FX conversion and rather hedge with an FX product that will give you the option of converting the currency but not the obligation to.

What if I don't know exactly when I will need to convert the currency?

Most contracts can be booked with a flexible delivery window during which the currency can be incrementally delivered as needed. Example, you agree to sell 100,000 USD for CAD in the month of December.

What if my need to convert the currency gets delayed?

FX swaps can be easily used to move contract settlement dates in time, without re-exposing the client to changes in the value of the currency.

Will I need special trade facilities or credit?

Any trade which carries an obligation or potential obligation to exchange in the future will need to be secured by a Forward Exposure Limit. This trade facility establishes the amount of currency and the maximum future date that a client can trade up to, and reflects the risk to the hedge provider that there could be a default event. This facility replaces the need for a client to post margin.