Hedging production currency is probably one of the toughest decisions a producer has to make. It’s the practice of managing losses, not capturing gains.
While putting the finishing touches on a financing package, an announcement comes out that Germany is now going to have to bail out Poland — in addition to Portugal, Spain, Hungary, Iceland, Greece and others.
Over the next few days, you watch as the Euro moves against the dollar from 1.64 to 1.50.
So what does that mean? is this a good thing or a bad thing? Should you buy now or wait for something to turn around?
Manufacturing a film could be described as an endless succession of zero-sum decisions.
Every action has an equal and opposite reaction. When shooting in foreign country, those actions tend to originate with the crew — while the reactions come from talent.
Your currency is no exception. Knowing when to pull the trigger and “lock-in” your currency can be a stressful, no-win decision.
The process of exchanging your hard earned dollars at the airport is seldom joyful; each little tick in the exchange rate costs you a few bucks here and a few bucks there (slowly corroding the value of the few thousand dollars you managed to put aside for this vacation).
Now imagine the impact those little ticks have on the value of the hundreds-of-thousands or millions you managed to raise to shoot your most beloved passion project.
In this volatile world market, currency losses create sinkholes in your budget that are large enough to kill the project.
If you don’t stabilize your currency from the get-go, tens or hundreds-of-thousands of dollars can evaporate from your budget in the middle of principal photography.
Where in the budget do you make-up those losses? Post-production? Music? How about genre: your epic Civil War drama has just been reduced to a slasher-pic on a farm that could have a great flashback sequence.
This can be averted with minimal stress if your currency issues are dealt with straightaway, but you mustn’t get emotional about it, and DO NOT try to “time the market.”
Producers have a few options available to them for mitigating downside currency risk:
>> Spot Market: If you have the all the equity in place then you (or your investor) should buy all the currency up front on the spot market and get it over with.
>> Forward FX Contract: If you still need to close your production loan, then coordinate with your equity investor to buy a forward FX contract NOW, which costs about 10 percent of the total amount of currency needed.
Savvy producers will have an allocation in the budget for this amount. The forward contract allows you to (1.) lock an exchange rate into your budget; (2.) purchase all your currency after your production loan closes; and (3.) mitigates future currency losses.
There are other foreign exchange (FX) products like forward window contracts and currency options, but unless you really know what you’re doing, stick with the products listed above.
Sometimes currency fluctuations can work in the producer’s favor, creating surplus money in the budget. This is a rare, but truly wonderful feeling. IT NEVER LASTS. If your currency is up, then lock-it in immediately.
If you lock-in your currency and it’s value continues to go up, then the investors and line producer will resent your impulsive “lack of faith."
If you don’t lock-in your currency and its value drops, then your investor and line producer will resent your stupidity.