Whenever your production uses different currencies between budget, funding or collateral you have a risk. Centtrip can help you minimise that risk.
Juggling different currencies can be a headache, especially when you’re trying to get your film or television project financed. If you have sterling (GBP) funding for your UK budget and euro funding for your EU location budget, then you’re fine. Sadly, things are seldom that simple.
There are two types of currency risk that, as a film producer, you need to manage when financing your project.
In both cases, talking with a currency management expert like Centtrip can help. But sometimes talking to a foreign exchange expert can feel like speaking a foreign language.
Here’s our guide to the four foreign exchange finance terms you need to know.
First, however, what are those two types of foreign exchange financing risk?
The foreign exchange risk when budget and funding currencies don’t match
If your budget is not funded in exactly matching currency (or multiple currencies) and amounts, there’s the risk that the funding may not equal your budget when it’s drawn down.
For example, your sterling budget of £10M may be funded in US dollars (USD) at an exchange rate of 1.35 USD/GBP (that is, total funding of US$13.5M). At the time of agreement, the funding might be adequate, but if the exchange rate moves to 1.40 USD/GBP, the agreed $13.5M will be equal to only £9.6M. Your budget will be under-funded by £400,000.
Exchange rates move constantly so what appears to be covered at the outset of a production may become a shortfall at some point during production.
This risk in this case is borne by three parties:
The completion guarantor – who needs to be satisfied that there is sufficient funding to make the film.
The financier – who needs to accept that an increase in funding might be needed to meet the budget.
The producer – who needs to satisfy both the completion bond guarantor and the financier(s) as above.
The foreign exchange risk when funding and collateral currencies don’t match
If your funding is in a different currency to the collateral against which it’s secured, there’s the risk the collateral may be insufficient to meet the loan.
For example, funding of $650K might be secured against a UK tax credit of £500K, payable in 12 months. At an exchange rate of 1.30 USD/GBP, the tax credit will be sufficient to pay back the funding. However, if the exchange rate moves to 1.25 by the time the payment is due, the £500K will convert into only $625K, leaving the producer $25K short.
The risk in this case is borne by two parties:
The financier – who needs to know that the collateral will be sufficient to repay the loan.
The producer – who will need to allocate additional collateral to repay the financier.
“Many producers wouldn't think about currency hedging. They'd be so busy, with their heads down, trying to get their film made. But, if you’re getting your finance in a foreign currency it should be top of your list. Thinking ahead and working with currency experts like Centtrip, you can save yourself a lot of heartache and aggro.”
So, now you know the types of risk and where they lie, let’s look at some language that can help you lower your risk.
1. Hedge, hedging
A foreign exchange hedge (or forex hedge) is an instrument or agreement used to reduce the possible impact of adverse movements in currency exchange rates.
When you’re dealing in different currencies, there’s always the risk that exchange rates will increase or decrease by more than expected, resulting in either an unexpected shortfall or a surplus.
Film producers often say that, for them, the risk is one-sided. Once the budget and funding are agreed, any unexpected surplus doesn’t mean they can make a better film. But, a shortfall can cause serious problems resulting in delay, deferrals or even suspension of the project.
Hedging is a way to protect your project by locking in the exchange rate that will apply to future transactions (such as funding drawdowns or international, on-location costs), thus limiting the effect of any future exchange rate movements.
In film finance, the most common forex hedging tools are spot contracts and forward contracts.
2. Spot rate
“Spot” means “on the spot”, i.e. the current rate. The foreign exchange spot rate is the current exchange rate at which a currency pair can be bought or sold, right now. It’s the prevailing quote for any given currency pair from a forex broker. It’s influenced by the foreign exchange market, market sentiment and government activity and policies.
If you exchange currency without a previously agreed rate (e.g. without using a previously agreed forward contract), then the exchange rate will be based on the market spot rate.
For example, if you receive £2M in funding for your film, and part of that is in US dollars, you may choose to convert the dollar amount to GBP at the current, spot rate. That will ensure you have the total GBP amount you require and removes the risk that exchange rates may move against you in the future.
3. Forward contract, forward exchange rate
“Forward” refers to the future. A forward contract (or simply “a forward”) is a contract to buy or sell a given amount of currency at a fixed rate on a given future date. Using a forward, you can lock in the exchange rate you will pay at the future date, removing the risk that rates will move against you in the meantime.
One of the main attractions is that they can be tailored to your precise needs, for example $107,550 in 57 days.
The forward contract may require the buyer to pay a deposit. The buyer may decide to make partial drawdowns from a forward contract, reducing the balance as and when they need the funds. There are no penalties for early settlement.
A forward exchange rate is the rate at which a forward contract will be executed. The main determinants of price for a forward are the time-value of money and the interest rate differential between the two currencies involved.
4. Margin, deposit
When a forward contract is agreed, the client is usually required to pay a deposit in order to secure the rate. This is known as the margin, or “initial margin” and is usually around 5-10% of the contract value. Some providers, like Centtrip, can provide zero-margin contracts on a case-by-case, application basis.
For example, you may have $500K funding to repay in a year’s time. To secure the exchange rate, you could agree a forward contract to convert £500K into $650K in 12 months’ time (at a forward rate of 1.30). In this case, you might be required to pay an initial 10% deposit / margin of £50K.
In some cases, if the market exchange rate moves against you in the period between agreeing the contract and maturity, you may be required to pay an additional sum to top up the margin and keep your contract position (i.e. the agreed forward rate) open.
The balance of the contract (in this example, £500K - £50K = £450K) is due when the contract matures.
Other currency terms and tools you may encounter
Limit Order – Limit orders are used as a tool to buy currency at a better rate than the current market rate. They are typically used in an appreciating market, where the buyer believes the appreciating trend will continue. Once the desired rate has been selected, the currency desk will execute the order, automatically buying the currency when the rate is available.
Stop Loss – A stop loss order is the opposite of a limit order and can be used, as the name implies, to stop further loss when an appreciating market starts to reverse. These are typically used to protect the buyer from buying currency at a poorer rate than expected or required.
OCO – This stands for One Cancels Other and is a combination of both a limit order and a stop loss. If the market appreciates and the limit is triggered, the stop loss will automatically be cancelled. Conversely, if the stop loss is triggered the limit order will automatically be cancelled. These are best used where a buyer wishes to take advantage of a positive market move, whilst protecting a key level.
How Centtrip can help
Working with a foreign exchange specialist can help you manage and minimise your currency risks.
And, it can make your life easier if you choose a specialist, like Centtrip, who also understands your world and the unique challenges and pressures of the film and television production industry.
As a result, you’ll be free to focus on the real task in hand – producing the best film possible.
You can read more about how Centtrip supports the film and TV sector here