by Stephen McPhie, CA
Partner, RSD Solutions Inc.
I recently attended a financial conference. Near the end was a panel of 3 economists who each gave their views on the economy. Always an interesting session as economists usually give polished, well conceived and authoritative sounding presentations. The last question they were asked, an old favourite, was what they expected the US dollar / Canadian dollar exchange rate to be in one year’s time. One economist thought the Loonie (Canadian dollar) would be weaker, one thought it would be stronger and the third thought it would be about the same. Usually you might expect 6 different answers from 3 economists but in this case, the question only allowed for 3 possibilities and we got them all. Each economist backed up his forecast with very sound reasoning and was very convincing.
In discussing foreign currency risk with potential clients, we are often told that banks have great expertise and provide very good views on currencies and so they follow their bank’s advice and manage their hedging strategies accordingly. Do you take a view in managing your company’s foreign currency exposures, either your own or that of your bank or trusted advisor?
Two of the economists at the conference work for banks and the third for a highly respected institution. Each economist at the conference backed up his forecast with very sound reasoning and was very convincing but 2 of them will be wrong and the only correct one will be only correct directionally.
As of today, each forecast outcome is possible but only one will happen – to some unknown extent. It depends on many factors, including a number in process at present as well as “known and unknown unknowns” and psychology.
So in identifying, quantifying and managing your foreign currency risks, the lesson is that you should not include your view as a significant factor in the equation. We have seen many companies that do this and regret it sooner or later.
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