How to best manage foreign investment risk

Patrick Idquival, Bianca Khurana and Ben Pirrie.

With Australia’s appeal as a production destination increasing throughout the past few years, and government incentives like the Producer Offset and Location Offset/Incentive attracting inward investment, there has been an influx of foreign currency payments into the country.

While the trend has helped the domestic industry reach new heights, the currency/foreign exchange (FX) market, like any financial market, is extremely volatile.

In 2022 alone, there was a 15 per cent variance in the AUD/USD exchange rate, equivalent to AUD$150,000 for every AUD$1,000,000 brought back.

The varying conditions mean it is important for productions to properly understand how to manage the risks involved with foreign investment.

One way this can be done is through engaging an FX partner, such as Ebury.

With capabilities in more than 130 currencies, the fintech company creates risk strategies to supplying collection accounts around the world and is backed by one of the world’s biggest banks in Santander.

Ebury’s production team of Patrick Idquival, Ben Pirrie, and Bianca Khurana continue to educate the industry on risk management, working closely with production companies, film financiers, PDV companies, media accountants, and lawyers on currency-related matters, and providing advice on tailored currency services for cross-border trade and transactions.

So when is this relevant to look at? Whenever a local production has foreign investment coming in for a project. Imagine a production has $USD coming in from a production partner based in the US and that project budget is denominated in $AUD. The production would need to ensure that they manage the FX risk associated with the foreign investment coming in.

According to Idquival, there are three key considerations for productions when dealing with FX risk.

1. Understand where your funds are coming from, set a budget rate, and find out how much foreign investment you need

“A few things need to be considered when setting your budget rate – the current rate at the time, the recent high, and the recent low. From there, you should incorporate a buffer to your budget rate based on these figures. For example, if the current rate is at 0.68, the 3-month high was 0.71 and the 3-month low was 0.66, you would set a budget rate of 0.71 with the assumption that the production would close on financing in the next three months.

“When it comes to finding how much foreign investment is needed, time and volatility are the biggest things to consider. For time, how long do you have till contracting is completed and you have closed on financing? For volatility, various economic events can influence where currency markets can go. Events like the RBA meeting and inflation prints can impact the currency market in a big way. In summary, the longer you have to wait to close – the more you are open to volatility and the larger your buffer should be.”

2. Partner with a reliable FX partner that can help with your requirements

“We can assist with structuring the payment process and analysing what budget rate should be used. We know what market-sensitive events are coming up and possible scenarios that could happen to the currency.

“A draft finance plan is best to always have to hand. This gives us an idea of how much AUD a production needs from the incoming foreign currency. This also gives us an idea of milestones and how long a production needs to hedge for. Sometimes this also gives us an idea if the client in fact needs to hedge or not.”

3. Have a hedging strategy in place to mitigate volatility

“A hedging strategy and or currency strategy is how a production manages any foreign exchange exposure that comes up. The biggest question we ask productions is what their tolerance of pain is. What I mean by that is that if the AUD was to appreciate to 0.75c against the USD – what will that mean for the production and project? If this would happen to a project that is unhedged, they would need to seek other forms of funding to fill the gap. Hedging strategies are quite tailored to an individual and/or companies risk appetite so it can often vary.”