Is anyone using forward exchange rate contracts or any other financial instruments to minimize the impact of this problem?
Looking for some advice.
Of course currency futures are available but I have found that there is not enough spread to make the risk worth it. Here is the basic idea - big carriers and the railways do the same with fuel by buying heating oil futures.
You get a stock broker to purchase a contract on the dollar. The lenth of time is for you to choose. (Of course, you have to put out the money now and pay any brokerage fees) The idea is that if you know that your customer will pay in 60 days you will take a 2 month contract. The idea is that if the US dollar sinks, your contract that you bought at todays date will offset any losses on the currency exchange in 2 months. If the US dollar goes up, your money in the bank will be worth more but you will receive less from the sale of your contract.
In the end what it does for you is solidify the price you are getting for your dollar at todays rate. You will not win nor lose but you can sleep better knowing that. Is it worth tying up your money and paying out brokerage fees? I don't think so. As of right now, you can buy a 1 year contract (March 2012) for 1.018 in comparison to 1.025 for the current month. If the dollar goes to 1.15 by next year it may have been worth it to lock it in but if it goes the other way and the US$ is worth more than Canadian you have locked all your money in at 1.018 and when others are reaping a better US$ you have to live with the decision you made.
The same thing goes for fuel but it really is a dangerous thing because if the broker doesn't sell the fuel before the end of the contract you are contractually required to take delivery of the fuel. What would you do with a tanker full of fuel? When the barrel of oil went to 140 last year, those people who bought it at price lost the difference when they sold the contract. Lets say they bought a contract of 5000 barrels of oil at $140 (hoping it would go to 200 like they said it would), they would have paid 700K and when they sold it maybe a month later at $50 the would have received 250k for a net loss of 450K plus brokerage fees. (OUCH).
Now if you would have entered into a contract with a large shipper and you were guaranteed payment at a certain rate, you may have thought this was a good idea to hedge (protect) yourself against a higher fuel price. In this case, you might make up the 450K in paying less for fuel at the pump making your net loss at zero.
Both CN and CP bought millions of dollars with of futures in heating oil back in 2004 and from what I understand they are still reaping the benefits. Yes, they pay at the pump the same price as we do but they "locked" in their price at 2004 levels so for every contract they sell, they make the difference. They sell the same amount of fuel as they use each month.
In the end, it only helps if your crystal ball is working right or you have tons of money to invest. It isn't for the faint of heart.
I hope it is clear as mud now.
