Currency Hedging with Shane Slater | E088
How FX impacts your business and how to minimize it.
On today's episode we have Shane Slater, Corporate Currency Specialist from the FirmaFX. He will talk about foreign exchanges, how it impacts business owners and how you can do better than just taking what the bank or your credit card will give you and how that can materially change your margins sometimes, depending on how the better rate you are paying before.
Episode Highlights:
1.15: Shane is a corporate currency specialist which means he helps SMEs who get exposed to international business and FX dealings on a regular daily business.
1.44: We are reducing the margins that the big banks are typically known for and providing services or advising when the rates may go in the company's favor and when there is an opportune time to do an exchange, says Shane.
2.18: There is one myth that when you convert 1 Canadian dollar to 80 Cents American or whatever currency, that does not mean you lost money. Getting less of one currency in exchange for a full unit of another is not a loss. That is just the exchange rate, says Jason.
4.09: The exchange which is in labor intensive and there is no material cost is quite excessive. You can get well under 1% depending on your volume and its better ease and convenience type situation, explains Shane.
4.26: The exchange rate is what it is, but if you are losing 3.5% on hundreds of thousands or millions of dollars each way from your profit that should be going to your pocket to reinvest in your business is not good.
5.33: On the minimum about $10,000 per transaction is a point where you are going to start saving 2 to $3 per transaction using a broker from FirmaFX, says Shane.
06.00: Shane talks about the challenge for business owners in international wire transfers and how he helps them with that.
7.01: Depending on the time zone we process outgoing wire process the same day or if not, the next business day. But in Australia and Europe it's hard do a same-day wire transfer because banking hours do change as per time zone, says Shane.
10.12: The currency hedging is the idea to guarantee you price point for at least some of your exchange so that you have the peace of mind of knowing exactly what you're going to pay or exactly what you're going to receive.
15.24: Jason explains that you don't have to be able to calculate all the stuff in hedging transactions because in principle the contracts are very straightforward for people.
16.22: There are times where exchanges are expensive. There are times where it's cheap, but in general, it's not just about how much you get in return but It's about how much you get in return compared to the basket, says Jason.
3 Key Points:
Shane talks about the costs associated to the consumer or the business owner when making a currency exchange.
Hedging is basically a process where you eliminate risks. Shane talks about what can be done to mitigate the risk of fluctuation of currency when you have business in one country, and you are delivering stuff in another country.
Hedging strategies change depending on every single client's position and need like what are your potential waters or what is your actual margins. If you're a tight margin business, Shane recommends hedging a good portion of your FX.
Tweetable Quotes:
"We are able to save companies not just money, but time also that they can then put back into their business and doing what they do best and help them grill in a multiple of ways." - Shane
"Some businesses consider hedging like gambling, but it's the exact opposite. But the general concept is you are exposing yourself to sometimes millions of dollars throughout years on a FX rate and they are budgeting this FX rate for your currency exchange." - Shane
"If you have income in the US dollars and expenses are also in the US dollar, I prefer for natural hedging." - Jason
Resources Mentioned:
Transcript;
Producer: Welcome to the Financial Planning for Canadian Business Owners Podcast. You will hear about industry insights with award-winning financial planner and entrepreneur, Jason Pereira. Through the interviews with different experts, with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success and make the most of your business and life. And now your host, Jason Pereira.
Jason Pereira: Hello, and welcome. Thank you for joining me. Today on the show I have Shane Slater, corporate currency specialist for firm FX. I brought Shane on the show to talk about foreign exchange and how it impacts business owners and how you can do better than just taking what the bank or your credit card will give you, and how that can materially change your margin sometimes depending on how bad a rate you were paying before. And with that, here we meet with Shane. Shane, thanks for taking the time today.
Shane Slater: Hey, a pleasure to be here.
Jason Pereira: Excellent. So Shane Slater, firm FX. Tell us a little bit about yourself and what it is you do.
Shane Slater: Yeah, absolutely. Well, first of all, thanks for having me on the show. Always a lovely opportunity to kind of speak to a bigger mass who's kind of unaware of myself and my organization, and the kind of services we offer. Basically, I'm a corporate currency specialist, which means we help out SMEs who get exposed to international business and FX dealings in the regular day-to-day business.
Shane Slater: So basically, companies that have revenues and various currencies, U.S. dollars, euros, pounds, Australian dollars, or have expenses perhaps in China spending U.S. dollars, RMB, euros, pounds, that kind of stuff. We basically help them not just process the currency exchange but also help them with international wires incoming and of course, outgoing as well. Reducing the margins that the big banks are typically known for, and also providing services and advising when the rates may go in their favor. And then when there's an opportune time to do an exchange is basically in a nutshell what we do for our clients.
Jason Pereira: Excellent. So there's a bunch to unpack there. So I brought you on the show to talk about how exchange rates have an impact on a business and how basically the costs of making foreign exchange work and how basically someone like yourself can not only help with the immediate needs but also longer-term ones. But before we move forward, I want to dispel one myth. And this is one I still can't believe exists, but it does.
Jason Pereira: And I got in this argument on Twitter the other day. So basically when you convert one Canadian dollar to 80 cents American or whatever currency we're talking about, that does not mean you lost money. Getting less of one currency in exchange for a full unit of another is not a loss. That is just the exchange rate. What matters is a principle called "purchasing power parity". And what that means is that if you can buy for $1 Canadian, the same basket of goods that you can buy for 80 cents American, that means that 80-cent exchange rate is a fair exchange rate because what really matters is what your money can buy.
Jason Pereira: So as long as the exchange rate reflects the difference in prices, you're golden. This is best encapsulated by something known as the "Big Mac Index", which compares the Big Mac price across the world. Now, it's not a perfect index, but it's a good little proxy for people to understand this principle. But oftentimes I hear people say that, "Oh, I'm going to the States. I'm going to lose X amount of dollars because I got to convert." That's not how it works. Now, it's not without cost and this is where I'm going to go back to you, Shane. So talk to me about the costs associated to the consumer or the business owner when making a currency exchange.
Shane Slater: Absolutely. Well, the example I think you're referring to is basically something you'll see on the biggest Canada-posted rate is a mid-market rate. Whereas the banks and an FX broker myself of course have to make some sort of margin because we're an operational business as well from the buy and the sell rate [inaudible 00:03:37] a stock or any other item. So the bank's typically charging you. If you'll see sometimes there'll be a margin between the buy and the sell about seven 7%, which is quite extreme.
Jason Pereira: Sorry. Extreme. 7%. There are very few things in life that we pay 7% transaction fees on in this industry. I think about how much people lose their mind over 5% on real estate. 7% on foreign exchange. Okay. So please continue. That was my-
Shane Slater: Yeah, just to clarify that it's 7% from the buy and the sell. So they're making three and a half percent on each direction, to be clear. But still, to do a simple transaction as a currency exchange, which isn't labor-intensive, there's no material cost to it. It is quite as excessive. Whereas a broker like myself, you can get well under 1% depending on your volume and a better ease and convenience type situation. So if you're losing three and a half percent on exchange rate, that can be quite substantial based off your volumes. Exchange rate is what it is, but if you're losing three and a half percent on hundreds of thousands or millions of dollars, that eats away your profit and profit that should be going in your pocket to reinvest in your business.
Jason Pereira: Absolutely. And I sent some of my clients to you in the past, so there's your endorsement. And so typically around cases where I've had clients who were moving between countries, they were either moving between countries and taking the proceeds of a home sale and converting them or some who were compensated in stock in U.S. dollars. And for some large tech companies, those resulted in some very large windfalls, right. So don't get me wrong. If we're talking about converting 50 bucks, calling you is not worth it.
Jason Pereira: We're talking about converting small... Take the bank... There's also some online challenger bank options likewise that they will convert. But we start talking about large sums and I want you to tell me where the line is for you essentially. And we start talking about 1% starting to equal a material amount of money. You're going to want that kind of service and that kind of white-glove guidance through this and for a better race. So When we're talking about a single transaction, where does it start to make sense for people to come to someone like you versus just accept the three and a half, either direction spread?
Shane Slater: So, yeah. So that's a great question, Jason. I'd say it varies, but on the minimum end, I'd say about $10,000 per transaction is a point where you're going to start saving two to $300 per transaction using a broker like myself, firm FX that is, versus the kind of big banks. Also, when the services may be very inconvenient for an SME where they may have to actually, believe it or not, walk into the bank.
Jason Pereira: Yeah.
Shane Slater: Speak to the teller, waste 30 minutes of their day instead of spending their time doing the regular business items. So $10,000 I'd say is around the point where it makes sense for them to save money, not to say that we won't do transactional sizes smaller than that because we're happy to help SMEs and help them grow, right. If we're able to save them, not just money, but time, they can then put that time back into their business to doing what they do best and help them grow in a multitude of ways.
Jason Pereira: So when we get to the five-figure mark, we're starting to look at some material, reasonable money, I mean, and $200 to go through to not just accept the normal bank rate quickly it's not a bad trade-off. So, and of course, the bigger the number gets, the bigger the savings.
Shane Slater: Of course. Yeah.
Jason Pereira: So basically that's the simple stuff. Now, you mentioned something about organizing international wire transfers. So talk to me about the challenge for business owners there and how you help with that.
Shane Slater: Well, I think the biggest challenge is the time delay that you'll have for an international wire and even domestic wires as well, believe it or not, how long it could take the banks to process something so simple as a wire, international and domestic. Outgoing wires aren't usually too bad, 48 to 70 hours for the bank. We process it depending on the time zone, same day, or if not the next business day. Again, Australia and Europe, it's hard to kind of do the same day because banking hours do change per time zone. But incoming wires, sometimes besides the nominal fees that the banks... The absurd fees the banks are charging for just receiving a wire, I've seen hundreds of dollars to receive a wire, it's a timeframe. It can take you 48 to a week. 48 hours to a week to receive funds.
Shane Slater: Whereas we have positioned internationally bank accounts so that we can receive funds same day, no incoming wire fees, nothing like that they'll get hit by. So we're going to help you speed the process. So you're not just going to save money on the exchange rate, but you do get the funds about 48 hours to a week faster than using your big bank. And of course, we're highly accessible. Pick up the phone and call me. There's no waits. Send me an email. Like yourself, Jason, you've emailed me before, we reply back very quickly. The service is of the utmost value for clients.
Jason Pereira: All right. So basically you can help facilitate with that. And of course, you do better than the individual rates. But let's talk about bigger business issues, right. So there's the one-off transactions which will happen. But one of the reasons I brought you on was specifically to talk about the concept of currency hedging. Hedging is basically a process where you eliminate risks.
Jason Pereira: So what is the risk business owners face? Well, let's say I'm a Canadian-based company with my expenses in Canada, and I enter into a long-term contract or a couple-year contract to deliver stuff to the U.S., and my revenue is in U.S. dollars. Well, that's great. That's fine. I got a good business opportunity there, but now I am exposed to the risk of the fluctuations in currency between Canadian and U.S. dollars. If that goes against me, my revenues actually technically drop and vice versa if I am basically buying U.S. goods in order to sell in Canada. So that is a business risk. So talk to me about what can be done to mitigate that risk.
Shane Slater: First of all, I love the way you phrase that. Using a hedging strategy to eliminate risk. And I think some people have this myth again that hedging... Some businesses consider that gambling, but it's actually the exact opposite. It is to-
Jason Pereira: The word literally means to prevent risk.
Shane Slater: So I'll have the conversation and some people say, "Oh, I don't want to gamble. The rates... I like to do on spot." And that's okay if that's the person's idea, but the general concept is that you are exposing yourself to sometimes millions of dollars throughout a year, two years, three years on FX rate. You're budgeting this FX rate for your currency exchange. If it moves outside of a couple of cents, again, we do recommend putting some sort of buffering for yourself because there's some fluctuation. But if you're like... The rates, for example, have moved in the last two weeks. They moved four and a half percent in this side of the U.S. dollars versus CAD.
Shane Slater: The euros have lost 10 cents in the last two months. If you're not mitigating for this risk, you can literally lose all your profits based on FX fluctuation. And so the idea of the hedge is that you have a forecasted rate, you have a timeframe of when you plan to settle these forward contracts or hedging, you can take as many drawdowns as you'd like. We typically sell them as open contracts, meaning you can draw down at any time as many times as you'd like. There are closed forwards, but those typically aren't the most beneficial and they're not as flexible. So it's a product we do offer, but not necessarily a good fit.
Shane Slater: And so in combination with that, the idea is to guarantee your price point for at least some of your foreign exchange, so that you have peace of mind of knowing exactly what you're going to pay or exactly what you're going to receive, which allows you to, again, calculate your expenses. It allows you to have peace of mind and not worry about the rates moving four cents in a week and how that impacts your business. Because these are things we, unfortunately, cannot control and can be sometimes extremely hard to predict. Bank forecasts change every month dramatically as you can see looking at the reports.
Jason Pereira: Well, and especially if you're a tight-margin business, right. We always pick on groceries as an example, right. 2% margins in the end. 2% margin, a slight currency move could wipe out all profitability, right. And-
Shane Slater: Absolutely.
Jason Pereira: Of course, you can adjust prices at that time of sale, but some businesses you've locked in to deliver at a certain point contractually. So that can be highly, highly dangerous. So talk to me about how the conversation starts with businesses who have these types of contracts. How do you assess their need? How do you basically work with them to figure out how much they should be hedging? And then what kind of strategies do you put in place in order to hedge that risk?
Shane Slater: Yeah. Great question. I can just quickly rewind. I love the point you put about the cost of goods and kind of changing that, but also keep in mind when you do that, that could potentially put a strain on your relationship with that client. So that's another reason why yes, you can do it, but at a certain point, are we potentially going to lose future business? Because we didn't hedge in advance and now we're raising prices on them, they may not like that. Just start off there. But yeah. So hedging strategies I would say change depending on every single client. And again, important things are, like you mentioned before, "What are your actual margins?" If you're a tight-margin business, I would highly recommend hedging a good portion of your effects because you are going to live or die by the FX rate moving up or down.
Shane Slater: And it doesn't feel good to lose money when you're doing a great job, but the rates move against you. On higher-margin companies, maybe a little less effects, maybe doing 50% and doing a cost-per-average strategy. Its rates go in their favor or against them. So in cost-per-average, doing in chunks, rates that they're happy with and makes sense in their books and are budgeted correctly so that if the rates do go up, the rates do go down, it does happen. At least you've budgeted accordingly and you're doing cost-per-average, to just kind of smooth it out. So there's no extreme volatility in those situations. Now, of course, the length of the contract matters too. Is it a 90-day term of when you're expected to get paid or is it going to be a year out?
Shane Slater: If it's a year out, you should probably be hedging a good portion of effects because as we see, the U.S. dollar, CAD, and other currency as well, can move so much within a one-year period. You run back to 2010 when the U.S. dollar to CAD was par. If you're a company that sold U.S. dollars and you are budgeting at $1.20, and then now you're getting at par, you just lost 20% of the profit.
Shane Slater: That's a problem. So I recommend having a conversation. There's no guideline exactly of "Do this, do this, do this." It's "What are your needs? What are your expectations? How much do you want to do? What's the timeframe? What happens if the rates go against you? How does that impact your business?" type of situation. And as somebody like myself can go over that conversation with you and kind of see what the pain points are and see what's best for you at the end of the day.
Jason Pereira: Effectively, they enter into a contract with your... Well you're the broker. They enter a contract where they will exchange X number of dollars in U.S. dollars for X number of Canadian dollars or vice versa at a set rate so that there's no ambiguity.
Shane Slater: Absolutely.
Jason Pereira: Now, I mean, there's other ways of hedging that are natural. I refer to natural hedging as just basically if you have U.S. dollar expenses and U.S. dollar income, hey, if you know what those are, right. If you have a million dollars in income and $750,000 in expenses, and you only need to convert back to 250,000 to Canadian dollars and hey, you don't have to hedge the full million. You hedge that part. Basically, the profit piece that's exposed to that currency risk. But in general, this sort of thing is frankly, sadly, not discussed enough. And I guess unless you get a lot of experience in the FX market, in your business, basically seeing how wildly your costs can shift or your revenues can shift, it's not something that's on top of mind. So talk to me about when the deals get big enough that it make sense to enter in these transactions. Are we talking the $10,000 mark again? Or should we be looking at something substantially larger?
Shane Slater: Sure. We're talking about forward contracts. I would recommend becoming more appealing to you when you're talking about six figures. A hundred thousand dollars is typically the smallest amount we'll do on a forward contract because that's... On $10,000, okay, you lose 500 bucks on a forward, it's not the end of the world. A Hundred thousand dollars you can lose thousands. On $10 million you can lose hundreds of thousands of dollars, and potentially expose yourself type of situation.
Shane Slater: So it can get quite dramatic quite quickly. And you talk about natural hedge, and of course, that's really important. Going back to the bank's high, high margins. If you're doing natural hedge, but you're not calculating correctly and you're calculating to buy and sell on both sides of markets, that's a seven-cent swing on hundreds of thousands of dollars. That's just money that's going to the banks for unnecessarily. And again, that's one of the questions I would ask. A broker like myself would ask you, "How much U.S. receivables do you have? How much U.S. outgoing do you have? How much do we have to actually exchange it and hedge?" type situation. So we're not over-exchanging unnecessarily.
Jason Pereira: The thing is too is that for a lot of people hearing this, they may think this is overly complicated. People are not accustomed to finance and derivatives classes, which by the way, the derivatives course is one of the highest failure rates that there is. But you don't have to be able to calculate all this stuff. I mean, in principle, these contracts are very straightforward for people. It's, "Hey, I know what price I'm getting full stop. I can either take that or not take that. End of story." But once you enter into the contract, it's a legal obligation that you have to deliver on, right. So it's definitely something that can be used to eliminate a lot of risk. And anyone who's been in business long enough to have seen Canadian dollar go from 60 cents to a buck 20... or was it a buck 10 or buck 20? Right back down to like 70, 80. It's funny.
Jason Pereira: I like to refer to Canada as the slow-moving Bitcoin. When people complain about the volatility of Bitcoin, I'm like, "Have you seen our currency?" It may take longer, but I don't think we're known necessarily for stability. That said, going back to the principle of "Do you lose money?", "purchasing power parity", hey, there are periods where we're not there. 60 cents, we were not there. A dollar 10, we were not there. That number does change over time. But when we're somewhere around the 80-cent mark, we're pretty damn close, so you're not really losing anything. So yeah, there are times where it's expensive. There are times where it's cheap, but in general, it's not just about how much you get in return. It's about how much you get in return compared to the basket.
Jason Pereira: So, Shane, I'd like to thank you for taking the time to explain this concept to people. Hopefully, anyone who's listening who can use your services will reach out because frankly, it's just two things: A. if you're not a business owner, if you're an advisor or whoever it is and you have clients entering into a large foreign currency transactions, this is a great value-add because, hey, you said basically a spread there is of almost 2.5%. That is a massive savings on large amounts. And then if you're a business owner, yeah, this is something that basically can save your profitability altogether. Any parting words of wisdom on this?
Shane Slater: Yeah, I mean, we were trained, I guess, from early age to use your banks for all your banking needs, and some are like a financial advisor who clearly is so specialized and cares about their clients. We're kind of the same model. You think outside the bank. There are much better options of people who actually care about you. They're not making billions of dollars off your back and have the call. Look what the options are. It's not just about the rates. Yes, you're going to save you money. Also, services, again, but I'm going above and beyond giving that personal touch to make sure that your needs are being met. Fees, wire fees. Why pay $50 out to the bank for a wire fee when you don't have to when you have a company like myself where domestic and international wire fee is free. For nominal fees or even free.
Jason Pereira: Well, you know why they charge those. So this is a funny thing to interject. So those systems are old and clunky, right. So they require labor hours. Now, so they charge fees for those. But the problem is that while they automated away a lot of those inefficiencies, they still charge those fees because they become a major profit center. Whereas companies like yours who recognize that, "Hey, this is not super complicated. We can do this pretty affordably." You're not trying to maintain these ridiculously fat margins off of them.
Shane Slater: Absolutely correct. Yes. That nails that pin on the head. They've done a good job of making it efficient, but that doesn't mean they're going to make it any cheaper for the consumer, so.
Jason Pereira: Well, we're not a competitive market in this country. We all know that. Although some people argue with me on Twitter that it's okay that way. I don't get it. And why not have one bank? I don't understand why we need five. So Shane, where can people find you?
Shane Slater: Oh, so, again, my company's from foreign exchange. My email address, hopefully, I can maybe put a link there, but it'd be Shane dot Slater, that's S-H-A-N-E dot Slater, S-L-A-T-E-R at firmafx.com. That's F-I-R-M-A fx.com. Or if you want to ever give me a call, the office number is 416-363-1583, and just ask for Shane.
Jason Pereira: Thank you, Shane. Very much appreciate it.
Shane Slater: It was an awesome conversation, Jason, and have yourself a wonderful day.
Jason Pereira: Thank you for listening yet again to find your plan for Canadian Business Owners. I know the release schedule of these episodes has not been as consistent as my other podcasts, but that's because it's harder to find good topics here. So if you are a listener who has a business-specific topic that you would like to hear about, please let me know. I can always find someone to bring on the show to have an in-depth conversation on. As always, if you enjoyed this podcast, please leave a review on Apple Podcast, SoundCloud, Spotify, Stitcher, wherever it is that's your podcast. Until next time. Take care.
Producer: This podcast was brought to you by Woodgate Financial, an award-winning financial planning firm, catering to high-net-worth individuals, business owners, and their families. To learn more, go to woodgate.com. You could subscribe to this podcast on Apple Podcast, Stitcher, Google Play, and Spotify. Or, find more episodes @jasonpereira.ca. You can even ask Siri, Alexa or Google Home to subscribe for you.