Clearwater Seafood (Clearwater) is a seafood company located on the east coast of Canada, and Clearwater Seafood income Fund with operations around the world. As a result of the increasing importance of the Canadian dollar relative to other currencies of the world, Clearwater recently stopped paying their distributions. The decision faced by the financial director to determine the strategy of the company should take to enable it to recover its distribution. This is due to the choice between various financial and operational resources to hedge currency risks that brought the company to its current situation Background:
Clearwater was founded in 1976 at Bedford, Nova Scotia as a local lobster distributer and later in 2002 went public. Clearwater Seafood harvests, processes, and distributes fresh and frozen fish and shellfish to sell worldwide. It holds major offshore rights to harvest clams, crab, lobster, scallops, and shrimp off the north eastern coast of Canada. Clearwater Seafood operates its own fleet of ships, along with off-shore and on-shore processing facilities. Foreign Exchange Risk:
Foreign exchange risk is the risk to the value of one’s assets when it is valued in another currency. The exchange rate of a currency to another may be volatile. It is this change in value of the currency that gives rise to foreign exchange risk. Depreciation in the currency in which your assets are denominated will result in a lower value of your assets when measured in another currency compared to the period before depreciation. The majority of Clearwater’s customers are international customers. In 2005, majority of Clearwater’s sales were from overseas customers. The source of their foreign exchange risk is the payment method that the company implements. The customers are billed in their domestic currency rather than in Canadian dollars. Clearwater deals with customers from the US, Japan, Europe and Asia. The company receives payment from its international customers in their respective currency. When the Canadian dollar appreciates in relation to all these currencies, the money that Clearwater receives from their customers loses value. The higher the Canadian dollar appreciates, the less Canadian dollars Clearwater can convert to with the US dollars, euros or yen that they receive from their customers. Risks associated with foreign exchange are partially mitigated by the fact Clearwater operates internationally, which reduces the impact of any country specific economic risks on its business. Clearwater also uses forward exchange contracts to manage its foreign currency exposures. Clearwater's sales denominated in U.S. dollars were approximately 55% of annual sales as on December 31st 2005. These forward contracts were such that a one-cent change in the U.S. dollar as converted to Canadian dollars would result in a $505,000 change in sales and gross profit. In addition, approximately 19% of 2005 annual sales were denominated in Euros. Based on the sales and hedges in place on December 31, 2005, a one-cent change in the Euro as converted to Canadian dollars would result in a $285,000 change in sales and gross profit. Also, 8% of 2005 annual sales were denominated in Japanese Yen. Based on 2005 annual sales, every one twentieth of a cent change in the Yen as converted to Canadian dollars would result in a change of ¥118,087,000 in sales and gross profit. It is clear that Clearwater faces significant foreign exchange risk and the implications of an adverse change in the currency conversions can be too huge for the company to endure. Business risk:
Business risk is the possibility that a company will have lower than anticipated profits or the company will incur a loss. Business risk may influenced by numerous factors, including sales volume, per-unit price, input costs, competition, and overall economic climate and government regulations. Clearwater's business depends on a continuing supply of product that...
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