Are you sure you don’t have FX exposures?

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

So your company operates only domestically and you are satisfied that all its purchases and sales are in the domestic currency.  No need then to spend any more time thinking about exchange rate volatility.  Are you sure?  How about your major suppliers?  Or your major customers?  Their currency exposures could affect you greatly. 

 

If your supplier gets a lot of inputs from abroad, he may be forced to jack up his prices to you if the domestic currency weakens.  Or if you sell inputs to a major customer who sells much of his product abroad, you are vulnerable to him passing on some or all of his currency exposures to you.  And of course, if your currency strengthens, you may suddenly be hit by a flood of cheap imports competing with your products.

 

So are your risk systems geared up to look at the bigger picture?

Foreign Exchange Risk for 2012

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

  

As we enter 2012, the euro has emerged as the weakest currency against the US dollar among the major currencies.   Investors still continue to short the euro on expectations the currency move lower is not finished.  This view is based on the ECB facility is a stop-gap measure and does not resolve the solvency issues.  Investors note the following: the Greece refinancing led by the IMF is still not functioning as expected, the cost of Italian and Spanish debt still remains around 7%, European banks are having a difficult time raising new capital and real investors lack additional appetite for further euro risk exposure.

 

Global economic indicators have started to improve, especially in the US.  However, the demand for European risk assets remains weak as the focus remains on a potential recession and contagion impact to the global economy.  Previously in 2011, anytime the euro came under pressure it was often followed by a countertrend rally.  However, 2012 could be different as real non-European investors continue reducing their euro sovereign bond exposures.  The supply surge of sovereign debt, euro $1 - 1.2 trillion, coming to the market in 2012 and the rollover, euro 700-800 billion, of bank paper/new capital could cause digestion problems as global investors to reduce European exposure.

 

In 2011, the US dollar was used as the funding currency for risky assets.  Given the prospect of a European recession, will cause the ECB to further cut rates and keep them low for an extended period.  The poor reception of capital market issues of European banks suggests that further balance sheet contraction is needed to meet the higher capital ratios.  Banks continue to place funds with the ECB and not employing the central bank liquidity in the real economy.  Real yields have moved into negative territory as the ECB tries to promote an investor shift into riskier assets.  The problem is that the time lag between liquidity creation and a move into risky assets has a time lag.  However, the uncertain outlook suggests this delay may take an extended period of time.

 

The use of the euro as a funding currency rather than an asset currency, a prolonged period of low ECB rates, the prospect of a European recession and uncertainty from the overhang of sovereign/bank debt will push the euro lower.  There will be limited countercyclical euro rallies compared to 2011.  The euro downtrend should continue through the summer until either political gridlock in Washington grabs investor attention as the November election approaches and/or policymakers can provide a resolution for the sovereign debt/banking crisis in Europe.   

Extreme Financial Risks & The Eurozone

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

“An error does not become truth by reason of multiplied propagation, nor does truth become error because nobody sees it.”  (Gandhi)

 

The point is that the emphasis of Eurozone policymakers focus on a stop gap liquidity facility rather than solvency can have long-term consequences.  This is illustrated in the following communiqué (The Future of the Eurozone (VOXEU, Konrad & Zschapitz, June 10^th)) on the outlook for the Eurozone.  

 

A year has passed since the initial bailout of Greece. The Eurozone is still on life support, the authors argue, including the view that Europe’s policymakers have got their strategy desperately wrong.  The failure to modify the Stability and Growth Pact to account for macroeconomic imbalances is a move in the wrong direction.  They treat the bailout as a temporary liquidity problem and not a solvency issue, which will ultimately increase the costs of the policy error. 

 

The authors note two options, which while considered, are not deemed viable.  The first would be the reversal of the socialization of private sector debt and funding from other ECB members to finance budget deficits – a return to national fiscal responsibility.  The economic cost of restructuring would have a large economic cost to all countries.  A second alternative is the use of “financial repression.”  This is when governments adopt measures to channel funds to themselves that may go elsewhere in unregulated markets.  This method is particularly effective at liquidating excessive government debt.  However, from an economic efficiency standpoint, it makes little sense for banks to use their funds to invest in government bonds unless it is part of their shareholder mandate.

Reinhart and Sbrancia (2011) characterize financial repression as consisting of the following key elements:

1. Explicit or indirect capping or control over interest rates, such as on government debt and deposit rates (e.g., Regulation Q).
2. Government ownership or control of domestic banks and financial institutions while placing barriers to entry before other institutions seeking to enter the market.
3. Creation or maintenance of a captive domestic market for government debt achieved by requiring domestic banks to hold government debt via reserve requirements, or by prohibiting or disincentivising alternative options that institutions might otherwise prefer.
4. Government restrictions on the transfer of assets abroad through the imposition of capital controls.

The authors consider following the current option of intergovernmental transfers as a means to avoid debt default or restructuring.  However, the sums required to make this viable would not be considered acceptable to taxpayers. The most likely outcome is a breakdown of the Eurozone prior to reaching an endpoint as policymakers focus on stop gap liquidity facility rather than deal with the solvency issue.   One possible reason for this breakdown is a rise in political tensions among member countries. A second, more likely outcome is a breakdown in the Eurozone as political tensions increase and investors lose confidence in the sustainability of the Eurozone as a whole.

 

For more information on this subject, click on the link:

http://www.voxeu.org/index.php?q=node/6628

 

Note: Because of it's relevance today, this is a re-posting of a blog that originally appeared in June

 

Do you take exchange rate views?

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

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.

Dazed and Confused - Managing Foreign Exchange Risk & the Greek Debt Crisis

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

The stakes continue to remain high in Athens as Greece’s economic rescuers attempt to craft another bailout facility.  Demonstrators, while angry, continue to be dazed and confused, and so are investors.  However, if talks breakdown it can have catastrophic consequences for Greece, the euro and the financial system.  The Greek banks and government would run out of money, cause a sharp euro downdraft and severe financial contagion.  The addition of another liquidity facility only postpones the day of reckoning.  Even if the new facility appeases the bears, the fundamental problem remains is that the country remains uncompetitive in global markets.  It will take years of painful structural reforms to restore competitiveness.  Investors with Greek or euro exposure may have to take a painful haircut much as investors in Argentina did in 2001.      

Despite the confusion in the streets, there remains a number of questions about the size of the package, of euro 119 billion (about US $120 billion) and the future viability of the Greek economy in its current state.   There seems to be a mistaken belief by Greek politicians, that the would be rescuers, would make available another euro 120 billion (or more) in 2012 to provide relief through 2014.  This would allow the new EU stability mechanism an opportunity to provide needed relief.  However, it seems to ignore the view of investors, the need for assistance to other countries and the recapitalization/restructuring of European banks. 

In addition, there are a number of challenges in German courts that the facility is “bridge-financing” and does not violate the “non-bailout” clause in the German and European Constitution.  However, analysts do not expect the court to rule the bailouts as unconstitutional, but the uncertainty surrounding the situation adds to potential risks.

In addition while Greek CDS spreads are near record levels, there seems to be further confusion as to what constitutes a default.  Rating agencies consider any type of debt restructuring, reprofiling, or even a voluntary rollover of maturing debt as a potential default.  However, a rollover according to the International Swap Dealers Assn. (ISDA) may not trigger a credit event.  European officials are trying to get around rating agencies’ reservations about a rollover so as to not to trigger a default or credit event.

The depth of the recession is taking a severe toll on the Greek economy as the economy could shrink by 4% in 2011, after falling over 4.5% in 2010.  The politicians continue to defend the welfare state and admit the medium-term budget targets are not achievable.  There is a growing concern that if the fractious politicians cannot make unpopular decisions – how can they avoid bankruptcy?  Dazed and confused - do you know your potential risk exposure?  

Extreme Financial Risks & The Eurozone

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

“An error does not become truth by reason of multiplied propagation, nor does truth become error because nobody sees it.”  (Gandhi)

 

The point is that the emphasis of Eurozone policymakers focus on a stop gap liquidity facility rather than solvency can have long-term consequences.  This is illustrated in the following communiqué (The Future of the Eurozone (VOXEU, Konrad & Zschapitz, June 10^th)) on the outlook for the Eurozone.  

 

A year has passed since the initial bailout of Greece. The Eurozone is still on life support, the authors argue, including the view that Europe’s policymakers have got their strategy desperately wrong.  The failure to modify the Stability and Growth Pact to account for macroeconomic imbalances is a move in the wrong direction.  They treat the bailout as a temporary liquidity problem and not a solvency issue, which will ultimately increase the costs of the policy error. 

 

The authors note two options, which while considered, are not deemed viable.  The first would be the reversal of the socialization of private sector debt and funding from other ECB members to finance budget deficits – a return to national fiscal responsibility.  The economic cost of restructuring would have a large economic cost to all countries.  A second alternative is the use of “financial repression.”  This is when governments adopt measures to channel funds to themselves that may go elsewhere in unregulated markets.  This method is particularly effective at liquidating excessive government debt.  However, from an economic efficiency standpoint, it makes little sense for banks to use their funds to invest in government bonds unless it is part of their shareholder mandate.

Reinhart and Sbrancia (2011) characterize financial repression as consisting of the following key elements:

1. Explicit or indirect capping or control over interest rates, such as on government debt and deposit rates (e.g., Regulation Q).
2. Government ownership or control of domestic banks and financial institutions while placing barriers to entry before other institutions seeking to enter the market.
3. Creation or maintenance of a captive domestic market for government debt achieved by requiring domestic banks to hold government debt via reserve requirements, or by prohibiting or disincentivising alternative options that institutions might otherwise prefer.
4. Government restrictions on the transfer of assets abroad through the imposition of capital controls.

The authors consider following the current option of intergovernmental transfers as a means to avoid debt default or restructuring.  However, the sums required to make this viable would not be considered acceptable to taxpayers. The most likely outcome is a breakdown of the Eurozone prior to reaching an endpoint as policymakers focus on stop gap liquidity facility rather than deal with the solvency issue.   One possible reason for this breakdown is a rise in political tensions among member countries. A second, more likely outcome is a breakdown in the Eurozone as political tensions increase and investors lose confidence in the sustainability of the Eurozone as a whole.

 

For more information on this subject, click on the link:

http://www.voxeu.org/index.php?q=node/6628

Implications of Increased Risk in the Foreign Exchange Markets

By Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Currency markets are showing increased signs of investor caution as various measures of risk aversion are rising.  This more cautious investor stance is based on concerns about the sustainability of US and global growth, inflation surprises in emerging markets (China), and general unease about debt levels and new asset bubbles.  Already, global Purchasing Managers Indices suggest that global growth concerns have extended across most countries.

The rise of risk aversion and investor uncertainty could persist for an extended period.  The traditional response of investors was to move into more liquid currencies based on the view that central banks would ease policy to keep the recovery intact.  However, it is possible in this new environment that central banks may become more cautious about providing support.  This can be found in recent policy statements of central banks:  the Fed has shown no signs of implementing QE3, the ECB still plan to raise rate at a slower pace, Canada and Australia continue to show a slight tightening bias and inflation remains a focus in China.   

The soft patch is driven by policymakers emphasizing post crisis adjustments and attempt to reduce the debt overhang.  As a result, G-20 central banks will be less reluctant to support a growth slowdown and investors focus on government debt.  The central bank of China and some emerging markets will continue to tighten monetary policy due to inflation fears reducing global liquidity.   In an environment of upside inflation risk and central bank caution, this could leave some of the commodity and liquidity-driven currencies more vulnerable.

 

Wobbly dollar …. wobbly America

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Forget Greece, Portugal, Ireland and Spain for a moment.  Reuters[1] reports that the United Nations warns of a possible collapse of the U.S. dollar.  No wonder!  And no wonder S&P placed a negative outlook on U.S. government debt!  Such public utterances were inconceivable in the very recent past, which indicates just how fast things seem to have got out of hand.  The U.S. has hit its $14.3 trillion federal debt ceiling (close to 100% of GDP and close to post second world war levels) and there is now a game of political chicken going on.  Some accounting contortions are allowing ongoing funding of expenditures but this can only be very temporary.

 

The level of spending cuts being mentioned falls far short of dealing with the deficit, let alone the gargantuan mountain of debt.  Meaningful tax increases don’t seem to be on the table.  Add to this debt at State and municipal level, the demographic time bomb of pension and health care liabilities, etc., and we have the script for a disaster movie.  With debt at existing levels, even tiny increases in interest rates will lead to huge increases in interest expense.  Currently, U.S debt yields are slightly above those of Germany.  However, the more scare stories there are, the more this gap is likely to rise.  Canada fell into this trap in the early 1990’s when it found out just how insidious compound interest is – spending cuts were more than offset by year over year increases in interest spending.  And the latter cannot be cut.  The more it rises, the more spending elsewhere must be cut and the fewer options are available.

 

Unfortunately, due to the staggering size of the problem, it has the potential to affect almost everyone on the planet but most of us can only look on with astonishment.  We don’t have a say in any of this.  Foreign currency exchange rates and interest rates have the potential to be very volatile for some time to come.

 

There is not a lot that we as individuals or companies can do but there are some things.  Companies should urgently re-evaluate their foreign currency exposures, even if they have done so recently, and revisit governance and risk management strategies for hedging and mitigating such exposures.  They should also examine current and future interest rate / capital structures.  It is imperative to have strong handle on these risk exposures and perform extreme scenario analysis.

---

[1] www.reuters.com/article/2011/05/25/economy-un-idUSN2511223620110525

The Failure of Risk Management: A Preliminary Look at the Cost of a Greek Bailout

Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

European politicians, when creating the euro, failed to consider the risks of their actions.  Policymakers looked at developments in Greece as a temporary liquidity squeeze rather than a solvency crisis.  Paolo Manasse wrote on this issue in a voxeu communiqué called “Greece, The Unbearable Heaviness of Debt”.   He noted analysts have been arguing that Greece will default on part of its debt – leaving its creditors to take a “haircut”.  Manesse argues the prospect is becoming more likely.

 

S&P further downgraded the junk rating of Greek debt reflecting the larger than projected budget deficit and the unsustainable growth rate of government debt.  They estimate a 50% haircut may be required to restore solvency.  There are expectations of a euro 50-60 billion loan from the EU/IMF, which at best may provide temporary relief.  Currently, the only other alternative to debt restructuring, is to leave the euro which seems extremely unlikely.  The rising interest rate on Greek debt combined with new debt issuance/borrowing indicates that the stock of debt is growing much faster than GDP, which is not sustainable.

 

Currently, there are three potential tools to make Greece’s debt sustainable: lowering the interest rate on outstanding debt, turning the primary deficit into a surplus, or writing down the existing debt stock.  A reduction in the market rate may provide a cushion for Greece.  Any move to a primary budget surplus would most likely cause social unrest.  The most likely scenario would be restructuring plus new money at a concessionary rate.  Eurozone bank exposure to sovereign Greek debt is estimated around $100 billion according to the BIS.  Any write-down of Greek debt along with the need to recapitalize the banks will be an expensive lesson on risk management.

The Euro will affect us all

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

  

Recent talk had been of Germany, France and other relatively strong Eurozone countries withdrawing from the Euro.  This talk has now turned to the possibility of weak countries like Greece, Portugal and others withdrawing from the Euro.  If that happened, their new domestic currencies would surely immediately depreciate massively.  However, they would still have unsustainable debt levels denominated in Euros.  At the same time, the Euro would quite possibly strengthen thus exacerbating the problem.  This would necessitate an immediate requirement to restructure and debt holders would need to take significant write-downs on the debt.  Actually, the underlying economies do not support existing levels of debt and current actions are really only delaying the inevitable.  Sooner or later, recognition of loss of underlying value must happen. 

 

Many of these debt holders are banks in Germany, France, etc.  German taxpayers, and hence the German government, are very strongly opposed to bailing out the weak Euro countries.  However, eventually they may effectively have to do so to some extent if their banks need bailing out.  Weak countries exiting the Euro would precipitate immediate action.  However, markets are pushing for early action in any event with bond yields for weak countries going through the roof.

 

All this has the potential to cause great volatility in foreign exchange rates and that volatility will likely go way beyond the Euro.  That will affect any business transacting in foreign currencies.  It will affect other businesses with significant indirect foreign sourced inputs, e.g. through their suppliers sourcing foreign components, and all consumers. 

 

Any business not assessing their FX exposures and formulating risk management strategies to deal with such exposures is taking a big gamble.  It may be that, for any individual business, the risk is within tolerable limits.  However, wouldn’t you feel more comfortable if you came to such conclusion from a proper assessment rather than just having a gut feel that this must be the case.  Guts can be very sensitive to a little bad food input.

Well that was fun,… for some: Canada’s election results

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

May 2^nd was a rather busy day for the global news junkie but here in Canada, international events took a back seat to the Federal election.  What started as a snooze fest was anything but in the last two weeks of campaigning and provided political risk managers – spin doctors (?) with some valuable lessons.  The end result was the Conservative Party received a majority government after three tries, the number three (New Democratic Party) unexpectedly become the number two and the nation’s number two, the Liberals may be going the way of the 1935 British Liberal party.  A special mention should also go out to the Bloc Quebecois which enjoyed one generation of staying power and was wiped out – perhaps joining the Liberal party in the history books.

 

A week after the fact and the dust has settled, a clearer picture of where that leaves Canada’s people and organizations is beginning to emerge.  With a strong left wing opposition, expect the right wing Conservatives to move a little closer to the centre on some issues, but fundamental to the Conservatives is low corporate and personal taxes and continued support for the energy sector (read; oil sands) and possibly agriculture.  Also expect the Conservatives to push for a national securities regulator and be pretty hands-off on the financial and greater business community.  End result: the Canadian dollar will continue to strengthen against the US dollar and likely most OECD currencies.  Expectations for yearend are already $USD 1.09 (CAD .92/1.00 USD) and I can see Patricia Croft’s and David Rosenberg’s three year expectation of $1.20 still a possibility.

 

So the story of the loonie’s rise continues and if anything is now reinforced.  For Canadian exporters, the argument for delaying effective hedge strategies is continuing to get weaker.  The question then is:  what discussions does your risk department have prior to and after an election?  Canada has shown, the unexpected can happen and the results can be significant. 

 

For more on this story click on the link to the Globe and Mail article:

http://tinyurl.com/4xo2jct

 

Martian Foreign Exchange Risk

By Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Even though I lived in the USA for several years, I still do not understand U.S. politics and politicians.  I don’t think most Americans do either.  They just seem to be born either Democrat or Republican and harbour a life-long hatred of the other that borders on vindictiveness at times.  Like many non-Americans, I just observe with amazement and never cease to be astonished about what goes on.  However for better or worse, what goes on in America profoundly affects not only Americans, but also the rest of the world.

Now that we know that the U.S. president wasn’t born on Mars (subject to forensic examination of documentation), will U.S. politicians turn their attention to making a serious attack on the deficit?  And what about the debt mountain?

 

Inflation fears are causing pressure for interest rate rises in a number of countries.  It does not appear that the Fed is yet ready to raise rates but things can change rapidly.

 

The U.S. dollar has been weak while commodity prices have been rising.  However some commentators are now opining that such process have overshot and are predicting falling commodity prices. 

 

What will happen to the Euro if the PIG bale outs become PIGS bale outs?  Or even PIGSI bale outs?  (Portugal, Ireland, Greece, Spain and Italy.)

 

And so on and so on …..

 

The bottom line is that we are facing a very uncertain situation of possible currency volatility.  Does your company have a thorough understanding of its foreign currency exposures in terms of identification, quantification and sensitivity to exchange rate fluctuations?  Do you have well-developed strategies and policies for dealing with these?  Are your hedges really effective and are you sure that they do not create additional exposures you are unaware of?

 

And if you answered yes to these questions, are you absolutely certain?  Are you sure that a yes 12 months ago is still a yes today?

Foreign Exchange Wrecking Ball

by Stephen McPhie, CA

Partner, RSD Solutions Inc

www.RSDsolutions.com

info@RSDsoulutions.com

 

 

If currency exchange rates have been volatile over the last few years, we are possibly looking at volatility squared over the next few years.  Portugal is joining Greece and Ireland in being bailed out.  These economies are relatively very small in the Eurozone.  However, many are wondering if Spain and then Italy will be in the cross hairs next and these are not small in the scheme of things.  Certainly Spain looks much better in many ways than Portugal but an employment rate in excess of 20% is a massive burden. 

 

Having been an observer and sometimes a victim of several economic cycles, I know that events, markets and politics can gain an unstoppable negative momentum.  Prices and rates tend to overshoot their proper level and correct, usually with little disruption on a macro scale.  However if a giant wrecking ball overshoots, it can knock down several buildings and that is a whole lot more difficult to correct.

 

Add to this the increasing number of voices expressing doubt over the whole future of the Euro itself, especially in the 2 large triple A rated Eurozone economies of Germany and France.  Especially so in Germany where more and more people are disquieted over the prospect of paying a high price to prop up much less developed Eurozone countries in order to save the Euro.

 

The Euro itself was a political creation.  It was weakened in its earlier days by Germany and France ignoring the fiscal rules.  Politicians are trying hard to ensure survival of the Euro.  For now, that is.  However, politicians do not always operate in a long term economically optimal way.  After all, politicians’ careers depend on voters in their own country at the next election and not on wider Eurozone’s economics.  Political winds can change direction very quickly.

 

All this suggests increasing exchange rate volatility.  While it does not appear likely that the Euro will die in the near term, there is a giant wrecking ball swinging around that has the ability to knock down a few houses.

 

Do you really have a handle on your company’s FX exposures?  Do you know the natural hedges and economics of your derivative hedges?  Have you done a full and proper evaluation of all this?  I have seen many companies that are comfortable with their positions until that giant wrecking ball comes crashing through the wall.

Volatility can hurt – personally or corporately

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

Personally I am short Sterling and long U.S. and Canadian dollars.  Therefore I am intimately, sometimes painfully and always nervously acquainted with the recent volatility of currency exchange rates.  I wake up in mornings wondering if next week’s credit card bill or next month’s property tax can get paid. 

Against the U.S. dollar Sterling is way off where it was a couple of years ago but still significantly higher than 8 years ago.  The strength of the Loonie (Canadian dollar) is a blessing that I currently enjoy.  However, whenever news like the latest inflation figures come out (not good) or Gaddafi kills civilians, I either take a deep breath or heave a sigh of relief. 

So far I have kept out of the local mission but my concerns are a microcosm of those that all treasurers should be familiar with, whether it is currency volatility or related to commodity prices, interest rates or any other such variable. 

I feel comfortable when I manage or hedge my position in some way.  This might be converting in advance of my needs when rates are favourable or incurring an expense in dollars or gaining some income in sterling.  This is short term.  In the longer term, I might take the option I have to move back to North America! 

I do know that I am aware of my position and risks and am doing just about everything I can and that I am constantly reassessing and looking for better ways to do things.  I am also often seeking other views and ideas. 

The question every financial executive and treasurer should be asking themselves is do they have the same satisfaction that they know their risk exposures and are managing them the best they can?

High flying and erratic loonie. Part 2

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