Hedging Currency Risk for International Grain Merchandisers

Grain Merchandisers intentionally eliminate as much currency risk as possible and trade based on the changes in the basis in the grain markets. The currency hedging program is in place to lock in basis values, and protect the value of merchandising positions. Money can be made or lost in the currency account, the commodities account, and the physical grain. So it is important to look at all three pieces of the trade to determine its success. Typically a business will hedge the net currency exposure of all its assets with reports created by the CFO.

Identify the exposure:

A US company contracted to buy $1,000,000 of Canadian corn valued in Canadian dollars during April 2015 for May 2015 delivery. On April 1st of 2015 ($1 CAD= $.78873 USD), the purchase of corn is valued at $788,730 in US dollars.

The company risk is that the USD will get weaker in relation to the CAD and may require more US dollars to purchase $1,000,000 CAD worth of Canadian corn, effectively raising the purchase basis.

Hedging Strategy:

The company’s currency risk management strategy is to hedge the purchase immediately with the purchase of 10 contracts or 1,000,000 June 2015 CAD futures trading at .78873.

Results:

When the corn was delivered in the middle of May the company paid the producer the agreed upon $1,000,000 CAD. Since ($1 CAD= $.82698USD) the corn actually cost $826,980 USD to pay the producer which represents a loss due to higher purchase price of $38,250 USD. (Original cost $788,730- current value $826,980 = -$38,250) The June 2015 CAD futures are now trading at .82698 or an increase of .03825. (10 Contracts or 1,000,000 June 20115 CAD futures x .03825 = a gain of $38,250) Therefore the additional funds necessary to pay the farmer in Canadian dollars will come from the gains in the value of the June 2015 CAD futures contracts. The currency hedging strategy protected the company from a loss due to the stronger Canadian dollar.