Effective: April 1, 2001
Responsibility: Vice-President and Chief Financial Office
The Corporation will minimize foreign currency risk to protect the value of foreign cash flows, both committed and anticipated, from the negative impact of exchange rate fluctuations. The overall corporate strategy will be to make use of hedging instruments when market conditions are judged to be favourable and to match cash flows from revenues to expenditures where practicable.
- This policy was updated September 2008.
- This policy was updated January 2007.
- This policy was updated April 1, 2003.
- This policy came into effect April 1, 2001.
- 2.3.12 General Accounting and Reporting Guidelines
- 2.3.29 Management of Investments
- 2.9.3 Delegation of Signing Authority
- CICA standards and guidelines (Sections 3855, 3861, 3865).
All questions pertaining to the interpretation or application of this policy should be referred to the Director, Policy and Internal Control. The responsibility for interpretation of this policy ultimately resides with the Director, Cash Management.
DEPARTMENT RESPONSIBLE TO UPDATE THIS WEBPAGE
To minimize foreign currency risk in order to protect the value of foreign cash flows, both committed and anticipated, from the negative impact of exchange rate fluctuations.
The overall strategy is to reduce the overall risk of foreign currency transactions by analyzing market conditions and when they are favourable:
- Hedging, in whole or in part, the cash requirements of foreign bureau operations.
- Hedging, in whole or in part, foreign currency requirements for significant contracts that may be identified from time to time.
- Hedging, in whole or in part, significant revenues paid in foreign currencies.
- Matching foreign currency revenue flows to expenditures where practicable.
Foreign Cash Flows
In fulfilling its mandate, the Corporation incurs costs and occasionally earns revenues outside Canada. Some of these cash flows are denominated in foreign currencies. The most common areas of activity in foreign currencies are as follows:
- Regular funding of foreign bureau operations in Washington, London and Paris;
- Periodic payments for the procurement of broadcast rights, mainly for the Olympic Games and other large sports events rights and for capital acquisitions;
- Regular cash advances to foreign correspondents, the settlement of miscellaneous accounts payable and contract payments;
- The receipt of revenues such as host broadcaster activities and proceeds from the sale of rights and programs.
The main foreign currencies traded by the Corporation are the U.S. Dollar (USD), the Euro (EUR) and the Great Britain Pound (GBP).
Identified Risk Exposures
CBC/Radio-Canada is subject to the following identified risks in relation to foreign currencies:
- Exchange rate risk – The constant fluctuation in foreign exchange rates exposes the Corporation to the possibility of cost uncertainty and the possible devaluation of cash inflows.
- Matching risk – The availability of foreign currencies must match the requirement for the currencies.
- Credit risk – Certain financial instruments used to manage foreign currency purchases carry a risk that the contracting party, usually the Corporation’s principal financial institution, will default on the arrangement.
Management of Risk Exposures
The Corporation’s exposures to the identified risks will be managed in the following ways:
- The Director, Cash Management will keep abreast of the evolution of foreign exchange rate fluctuations, expert market analysis, commentary and other information on forecasted rates available from reliable sources such as major financial institutions.
- The Director, Cash Management will prepare forecasts of foreign currency requirements.
- Where significant foreign currency requirements are identified and their timing is fairly certain, the Director, Cash Management will assess the feasibility and the desirability of entering into a hedging arrangement.
- All significant forward contracts, options and other instruments used to hedge a foreign currency exposure will be negotiated with providers holding credit ratings equivalent to or better than that of the major Canadian banks.
- The Director, Cash Management will establish the annual foreign currency planning rates for the USD, EUR and GBP in conjunction with the Corporate Plan and will post them to the Corporate SAP system. The rates will be based on recent forecast published by the major financial institutions.
- The Corporation will engage in hedging arrangements based on identified needs only and not for speculative reasons.
- The Director, Cash Management will prepare an analysis of the year’s foreign currency trades made by the Corporation, comparing them to the planning rates and the prevailing market rates in order to gain knowledge and perspective for use in implementing management strategies.
Execution of Foreign Currency Trades
There are a number of ways in which a foreign currency trade can be executed:
- A foreign currency trade can be made at the spot rate on the transaction date. The foreign currency is bought or sold at the spot rate, which is the current market rate.
- Forward contracts are financial contracts that fix the exchange rate at a defined future date for a guaranteed delivery price on a stated amount of the currency. A forward contract is the most common and straightforward hedging tool to manage foreign exchange risk.
- An option is a financial contract giving the Corporation the right to buy (known as a call) or sell (known as a put) a stated amount of a currency at a predefined price over a certain period of time. The Corporation would choose to exercise the option if, during its life, conditions were favourable. Options carry an up-front cost and are therefore a less-used hedging tool.
- Derivatives are contracts that simultaneously use a combination of options, forward contracts and spot purchases with other special features to create a customized hedging instrument fitting a particular situation.
The use of hedging instruments becomes inherently more complex and requires continual monitoring of market conditions. Potentially, they may also require special accounting treatment and financial statement disclosure. The use of these tools will be limited to situations where they provide a significant and measurable advantage and are well understood.
Roles and Responsibilities
- The Director, Cash Management will be responsible for all foreign currency purchases in accordance with policy.
- F&A personnel in the Networks and Corporate offices will inform the Director, Cash Management of the details (date, amount and other relevant terms) of commitments and contractual arrangements made involving a foreign currency and valued at more than $500,000. This applies to cash receipts as well as outlays.
- Personnel in the Networks and Corporate offices will consult with the Director, Cash Management in the course of negotiating contracts that may contain an exposure to foreign exchange risk.
- The foreign bureaus in London, Paris and Washington will communicate their cash requirements to the Director, Cash Management on a regular basis.
- Hedging arrangements must be approved according to the Delegation of Signing Authority. In addition, contracts with duration in excess of 12 months must be approved by the Chief Financial Officer.
- The Director, Cash Management will communicate the details of hedging transactions to the Director, Accounting and Corporate Reporting who will be responsible to ensure that the transactions receive proper accounting treatment and financial statement disclosure.