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Davidl
02-03-2015, 09:50 PM
Im Canadian and the exchange rate right now is one USD = 1.25 CAD. How does one deal with the currency exchange when buying materials that are from USA. Is it unusual for Canadian companies to keep USD dollars or forward interest agreements?

Harold Mansfield
02-04-2015, 08:19 AM
Im Canadian and the exchange rate right now is one USD = 1.25 CAD. How does one deal with the currency exchange when buying materials that are from USA. Is it unusual for Canadian companies to keep USD dollars or forward interest agreements?

When people from out of country pay me, they pay me in USD. I don't know how they do their books on the other end, but as far as I'm concerned there is no exchange rate. My price is USD. I suspect other companies do it the exact same way. They don't give you an American price and a Canadian price. It's one price. You don't even have to do anything, when you swipe your card you are paying USD.

I"m assuming if you are buying materials it's with checks, wire transfer or credit cards. Not sure why you need to keep paper money around for any reason.

Freelancier
02-04-2015, 09:24 AM
Bigger companies will do currency hedges for their inter-country operations. Airlines hedge their fuel costs. Processed food companies hedge their commodity pricing. They all know they are going to do large amounts of a certain type of transaction and want cost reliability.

Small companies may or may not, depending on how much of that type of business they do and how far out their supply chain needs to be. If your company buys what it needs and uses it immediately, you just price based on the current conditions. But if you have to buy your supply 120 days out and want price consistency, you hedge the transaction if you want to know exactly what your costs are going to be on that transaction when it gets delivered.

And, yes, this includes companies doing business between Canada and USA.

Davidl
02-04-2015, 01:46 PM
harold - I live in Canada and deal in CAD. The situation is the opposite. I have to pay 1.25 cad for every USD whether its paper or check. So when the currency is not great it cost 10-20 percent more and is a pretty big increase.

Im unfamiliar with hedging the transaction. Is this an agreement between you and the supplier or between you and the bank? Do you pay a percentage like a forward interest agreement?

Is it possible to hold USD and CAD currency in the companies bank account?

Freelancier
02-04-2015, 02:12 PM
Foreign exchange hedge - Wikipedia, the free encyclopedia (http://en.wikipedia.org/wiki/Foreign_exchange_hedge)

Yes, there's a transaction cost involved in creating the financial instrument (there always is). Talk with your bank as a starting point, then figure out who else offers the type of transaction you want and go from there. Just know that you may not find the hedging instrument in the size you need, so you might have to look for an alternative, like a long-term put option contract on a currency ETF or similar, depending on which direction you want to hedge.

I've only read about this stuff, so it's outside my area of specific knowledge, but you want to go find a really good broker who works for one of the bigger banks and work out the possibilities. This is not "bank branch manager" territory, it's the side of the bank that handles larger investments for clients.

Harold Mansfield
02-04-2015, 02:55 PM
harold - I live in Canada and deal in CAD. The situation is the opposite. I have to pay 1.25 cad for every USD whether its paper or check. So when the currency is not great it cost 10-20 percent more and is a pretty big increase.
?

I have clients in Iceland, Jamaica, France and England. I send the invoices and my invoices are in USD. No matter what their currency is, the transaction automatically takes out the value in USD. They don't have to do anything except their own math for the books.

If you are purchasing from people in the US they will bill you in USD. The amount is set. If you're paying cash, you do the math.
If you're paying credit or debit card it does it automatically.

No, you do not need to carry multiple currencies in the bank. I'm not even sure you can do that. It's one currency unless you have investments or CD's or something. If you want all of your money and balances in USD, you can do that. If you want to bill everyone in USD, you can do that.

You can withdraw the funds in any currency that they have available and they'll do the math for you.
If you say give me $1 USD, they'll subtract $1.25 CAD from your account and give you a nice crisp George Washington saw buck.

I grew up in Detroit and am used to CAD and the exchange rates, plus years in S. Florida and Las Vegas dealing with people and money from all over the world in various amounts from hundreds to thousands including paying for services and buying products and supplies.

Transaction wise, it's not that complicated. Bookkeeping wise...that's another story.

As for leveraging different exchange rates to buy product the way airlines buy fuel, you need someone knowledgeable to help with that. Like Freelancer said, that takes a decent education on financial markets to know which bets to hedge.

Freelancier
02-04-2015, 03:04 PM
If you are purchasing from people in the US they will bill you in USD. The amount is set.
Only if the transaction is consummated immediately.

Let's say he's buying a big shipment of lumber for delivery in 90 days. He'll pay for it in 120 days or so (90 days + 30 days to pay). But he needs to budget for it today. If the dollar to CAD relationship worsens for him -- e.g., moves to $1 = $1.30 CAD -- then he'll actually owe MORE than what was originally contracted, just because he's keeping his money in CAD and paying someone in USD, so when time comes to pay, the amount of CAD he needs to create the right number of USD is more. So he buys a financial instrument to offset that possibility, usually costing a small percentage of the total amount that is paid to another party who will provide him with the option to purchase the right amount of USD he needs in 120 days to pay the contract regardless of what happens to the relationship between the CAD and USD.

It's primarily used in large transactions, though, just because it's complicated to follow and requires a broker with knowledge of and access to those markets.

Harold Mansfield
02-04-2015, 03:08 PM
Only if the transaction is consummated immediately.

Let's say he's buying a big shipment of lumber for delivery in 90 days. He'll pay for it in 120 days or so (90 days + 30 days to pay). But he needs to budget for it today. If the dollar to CAD relationship worsens for him -- e.g., moves to $1 = $1.30 CAD -- then he'll actually owe MORE than what was originally contracted, just because he's keeping his money in CAD and paying someone in USD, so when time comes to pay, the amount of CAD he needs to create the right number of USD is more. So he buys a financial instrument to offset that possibility, usually costing a small percentage of the total amount that is paid to another party who will provide him with the option to purchase the right amount of USD he needs in 120 days to pay the contract regardless of what happens to the relationship between the CAD and USD.

It's primarily used in large transactions, though, just because it's complicated to follow and requires a broker with knowledge of and access to those markets.

That's true. Definitely true. Kind of how airlines buy fuel in advance to hedge against rising costs 3 or more years down the line.
If that's what he's talking about, then scrap everything I just said because it's not applicable.

In the words of Gilda Radner, "Never mind".

Fulcrum
02-04-2015, 08:19 PM
I import from the US to Canada on bi-weekly basis (on average) and I keep a close eye on the exchange rate. Even though my primary suppliers have offered terms, I choose to pay via credit card when my orders ship. I need to check my latest statements to make sure that the currency conversion is still only $0.03 more than the actual rate.

As to handling the lower exchange, you need to make sure your pricing can handle the fluctuation. For every $100 you were spending on material when the dollar was at par, you will now be spending $125ish. You will need to figure out if you have to raise your prices to maintain your profits or if you are comfortable with eating the difference (this is market dependent). Don't forget about the brokerage fees and GST you will pay at the border if they are not built into the shipping price.

With regards to keeping US funds in a Canadian account, you will need to open a second account for your company that is linked to your primary account. This second account will be used only for the US based transactions. Be cautious with this approach though, and clarify with an accountant, as I do believe that you will be subject to capital gain taxes on the currency fluctuations.

Out of curiosity, what are you importing?

Davidl
02-05-2015, 12:26 PM
appreciate the help from everyone.

I'm looking to importing materials like leather to be made into products. Also machinery and tools.

Fulcrum
02-05-2015, 03:50 PM
I'm looking to importing materials like leather to be made into products. Also machinery and tools.

Leather can be found locally. If memory serves me correct, there are 2 or 3 tanneries in southwestern Ontario.

Don't spend too much time worrying about fluctuating exchange rates when it comes to equipment and tools. Yes, it will affect your final price but if you need the equipment than you need the equipment.

mbabruin
03-05-2015, 03:11 PM
Hi Davidl and Fulcrum, I'm actually doing research on this very topic right now. My MBA team at the UCLA Anderson School of Management has found that small- and mid-sized businesses generally overpay when it comes to currency exchange -- in the area of 5-8% per transaction -- because they can't access better rates like larger companies. We're working on a project with a new venture that aims to pool transactions from small businesses to bring down rates to 1%.

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