The Loonie

As a result of globalization, more and more companies find themselves exposed to foreign currency fluctuations. The concept of hedging is extremely important as it allows a company to minimize, if not eliminate, the risks associated with a parallel transaction, and therefore secures profit margins. Although hedging is crucial, the counterparty with whom the transaction is undertaken is just as essential. We have experienced many bankruptcies over the years, especially since the recent subprime crisis. The following table presents the largest bankruptcies in U.S. history and the most recent, MF Global Holdings Ltd., a commodity and derivative products broker is highlighted. As a matter of fact, the company filed for Chapter 11 protection mainly due to a large exposure mounting to $6.3 billion in European sovereign debt. Also, regulators are investigating the fate of $633 million in customer accounts that went missing as well as looking into the “window dressing” activity known to disguise the debt level to investors before a public reporting date.



As Dave Parkinson from the Globe and Mail questioned: Is MF Global a canary in the coal mine? Many investment firms currently find themselves being exposed to the Euro-debt and we believe that it is just a matter of time before they reveal their true colors. In fact, it is now for Jefferies Group, a U.S. investment bank, to face the music. Its shares dropped nearly 20% on Thursday on rumours that the Group held a significant exposure in the Euro-zone sovereign debt. The share has gained ground since then. It is clear that markets will experience unusual volatility in the next months as more uncertainty will make investors extremely nervous. It is highly recommended that a hedging strategy be implemented and followed in order to secure your company’s profit margins and allow you to focus on the core of your business. The recent recession proved that Canadian banks are financially sound and solid counterparties to support companies in their decision-making as well as in their risk management.