Hedging Equipment Purchases

May 03, 2021 | Francis Afonso


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Rising Commodity Input Costs

Recent supply side concerns, impacts from the Covid-19 Pandemic and general inflationary trends in commodities are all combining to create rising input costs for manufacturers. These increases are forecast to have a knock-on effect on consumers and businesses that utilize industrial and commercial equipment. With higher input costs, it’s likely that industrial equipment, agricultural machines and consumer appliances will rise over the near term.

Rising Interest Rates

As interest rates represent the effective cost of borrowing, a sudden rise in interest rates can have detrimental impacts on a company or individual’s pre-planned equipment purchase. However, it is possible to hedge interest rate exposure and more effectively manage the damages associated with potentially higher rates. A simple interest rate hedging strategy can be used to minimize the impact of unforeseen fluctuations and provide a less volatile cost of financing

Currency Fluctuations

A Canadian company wishes to purchase a piece of equipment and after receiving quotes from several suppliers (both domestic and foreign), has chosen to buy from a company in China. The equipment costs $200,000 USD at the time of placing the order and the exchange rate is 1.25, meaning the cost to the company in CAD is $250,000. Four months later, when the invoice is due for payment, the CAD has weakened and the exchange rate is now 1.30. The cost to the company to settle the same $200,000 USD payable is now $260,000 CAD. Transaction exposure has resulted in an additional unexpected cost to the company of $10,000. A simple currency hedging strategy could have been used to lock in the rate at the time of the initial order and guarantee that exchange rate.

Conclusion

Given the current economic environment we find ourselves in, a prudent risk mitigation strategy would give businesses the ability to plan and cost their future equipment purchases with the peace of mind of not worrying about unforeseen swings in the variables summarized above. The easiest way to think about an equipment hedge is like a form of insurance against unnecessary costs.

Our risk management team is uniquely equipped to help protect you, contact us today to let us know how we can assist.