As an active vehicle exporter, have you ever thought: “Why is it so difficult to book an FX forward?” With Rate Lock, Signal’s newest exporter-focused product, you can do exactly that - book an FX forward on every vehicle you buy. This innovative service safeguards your profits by efficiently eliminating FX exposure.
The Canada to US used vehicle export market is a thriving industry worth a staggering $15B annually.
Several factors contribute to the success of this market. One factor is the high penetration of leasing in the Canadian market, which results in Canadian customers leasing new vehicles more frequently and trading in their vehicles before the end of their lease term. Perhaps a more obvious factor is the significant role foreign exchange (FX) rates play in the export ecosystem. How you calculate FX is a crucial component when determining the value of a Canadian vehicle destined for the US market.
There are initially two times to factor in your FX rates, first at the time of appraisal when you bid the vehicle, and second when you acquire it. To illustrate this, let's do the math as though we’re at auction evaluating a vehicle for export.
In this example, we’ve come prepared and we already know the US value of the vehicle is $45,000; pack (inc. auction fees) and margin deductions are USD $1,850 and USD $2,500 respectively; and the current exchange rate is 1.315.
The formula that dictates our CAD bid is as follows:
(US value minus pack minus margin) times FX rate = CDN bid price.
If we plug in our numbers, we get:
($45,000 – $1,850 – $2,500 = $40,650) * 1.315 = $53,454.75
As you can see, the resulting maximum bid you can make, while maintaining your target margin would be $53,455.
Once the vehicle is purchased, it is shipped to the US and processed by your Registered Importer. After 30-40 days, it is ready to be sold.
At this point, there are three potential scenarios:
1: Exchange rate remains unchanged: Assuming the US value remains steady, you can expect to make the projected $2,500 profit on this vehicle.
2: Exchange rate increases: In this situation, the value of the USD currency rises. This is a favourable situation for exporters, as it means they can potentially earn even higher profits when converting the proceeds back into CAD.
3: Exchange rate decreases: In this situation, the value of the USD currency decreases, which can lead to reduced profits or even losses. This is the scenario everyone wants to protect against.
Exporters can consider two strategies for scenario #3 above. The first involves allowing the market to play out, accepting some gains and some losses, with the hope of breaking even over the long term.
The second strategy involves the use of FX forwards, where exporters book forward contracts to lock in an agreed upon exchange rate. For instance, an exporter might book a $5M forward with a six-month term, on their belief that the current exchange rate is in their favour. In booking forwards, the best-case scenario is of course when the US dollar drops, allowing the exporter to bid on vehicles using a more advantageous FX rate. FX forwards are not available to most exporters, they are considered a complex derivative that requires a financial review, credit checks and typically a cash bond to secure a rate. They are typically booked with a forecast of future CAD requirements and are larger transactions sizes, generally in the millions.
Speculating on exchange rates can be risky, and there are two potential downside scenarios to consider:
First, if the US dollar strengthens to 1.36 CAD while your forwards were booked at 1.32, your bids will be uncompetitive, and your margin is reduced. Second, if an exporter has committed to closing out a forward contract but lacks sufficient funds or transactions to cover it, they may find themselves with no leverage and having to make financial sacrifices to fulfill their contract obligations.
Being able to manage FX risk on a vehicle-by-vehicle basis is the ideal scenario. Historically, this has not been feasible. No bank or FX provider offers this service today.
This is where Signal comes in.
Meet Rate Lock: Signal’s newest feature that enables exporters to mitigate FX exposure efficiently and effectively. Rate Lock provides a streamlined micro-forward solution that (finally) empowers exporters by matching a forward to each vehicle they purchase, daily.
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