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Currency Can Kill Your Movie

by Jeff Steele

Hedging currency for a film production is one of the toughest decisions a producer has to make.  It’s the practice of managing losses, as opposed to capturing gains.

Scenario: You’re scheduled to start pre-production in six weeks in Europe.  While putting the finishing touches on your financing package an announcement comes out that Germany now has to bailout 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? What the exchange rate in your budget? Does your budget even have an exchange rate?

Manufacturing a film is an endless succession of zero-sum decisions.  Every action has an equal and opposite reaction.  Most actions tend to originate with the crew – while the reactions stem from the talent.  Your currency is no exception.  Knowing when to pull the trigger and “lock-in” your currency can be a stressful, no-win decision.

It’s no different than going on vacation and exchanging your hard earned dollars at the airport; each little tick in the exchange rate costs you a few bucks here and a few bucks there: slowly eroding the value of the few shekels you managed to squirrel-away for this vacation.  Now imagine the impact those little foreign exchange ticks have on the value of the hundreds-of-thousands or millions you just raised to shoot your film.  In this volatile world market, currency losses create sinkholes in your budget that are large enough to kill your project.  If you don’t stabilize your currency from the get-go, hundreds-of-thousands of dollars can evaporate from your budget in the middle of principal photography.  What do you slash in your budget to make-up those losses?  Do you go back to your investor?  Which babies do you kill first: VFX? Music? Locations? How about Genre?  Your epic Civil War drama has just been reduced to a period slasher-pic on a farm.

This can be averted 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 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% 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 (i) lock an exchange rate into your budget, (ii) purchase all your currency after your production loan closes and (iii) 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 you’re currency is up, then lock-it in immediately.  Suze Orman says to cut your losses at 10%.  Jeff Steele says to lock your currency at the first opportunity to do so — with the understanding that:

If you lock-in your currency and it’s value continues to go up, then your investors and producers will resent your impulsive “lack of faith”;

If you don’t lock-in your currency and its value drops, then your investors and producers will resent your stupidity.

12 Responses leave one →
  1. Everton Scott permalink
    May 12, 2011

    This can be particularly frustrating recently as the dollar has been weakening and has been the subject of much speculation on news outlets.

    The pound killed us in the last month and I watched my 6.5M project balloon into a 7M USD. Complicating this further is the fact that this project is going into production in New Zealand. So on top of funding from America and Britain, the production funds have to be converted again to NZ dollars.

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  2. May 12, 2011

    Those 10% budget contingencies can come in very handy during these times.

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    • Jeff Steele permalink
      May 12, 2011

      @ Michael I don’t recommend using your contingencies for currency issues. Allocate ahead.

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  3. May 12, 2011

    Even if not shooting abroad, some of the film’s funds should be invested in a (managed) Forex account. A competent trader can produce a net gain of 7% per month. As it often takes a long time to raise the funds, the seed money can grow significantly during this time.

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    • Harold permalink
      May 20, 2011

      What are the risk of investing in a managed Forex account?

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    • May 21, 2011

      While it may be effective, you should consider the moral implications about investing in Forex. Money does not get created out of thin air and because this type of trading does not actually produce anything, it has to come from somewhere. Forex trading does not make money, it takes money. At the end of the day one has to ask themselves if they want to supplement their income through a parasitic action done on foreign economies.

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      • Jeff Steele permalink
        May 23, 2011

        Sad but true. Shooting in the US alleviates this issue.

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    • July 16, 2011

      In Forex, just like in other financial markets, there are many unscrupulous brokers and firms. Similar to finding a dentist, use your friends and connections to find a service provider you can trust. Don’t leave this for the last minute, develop a relationship, and follow the source over time. Keep in mind that the longer you keep funds invested, the more likely it is to grow.

      A good example is this live curve: it shows the growth of $2K invested on Feb 1st, 2011. http://qxxlalpha.mt4live.com. We might share more information in the future with Synergy members (http://filmsynergy.com).

      Regarding ethical concerns, this is an issue of personal opinion and preference. Similar to eating meat, waging war, driving gasoline cars, or (not) believing in supernatural entities, One can spend time and energy trying to convince others, but then the film might never get made…

      Let me share a good quote from the SEC (Forex is a related category):

      “…day trading is neither illegal nor is it unethical…”

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  4. May 18, 2011

    On top of that (sensible) advice, you should also try to borrow/fund in the currency of your collateral. For instance, it is tempting to try and get your funding in say GBP because that is what the production is gong to spend. However film sales are mostly factored in USD so if you expect to repay your investors in something other than USD it will leave you exposed on the backend/repayment side later. However that UK tax credit is in GBP so here the funding should be in GBP. So you would be best off to get your investors to fund in the currency they will be repaid in, and use the tools mentioned to protect your production budget.

    PS: The cost of hedging should be significantly lower than 10%, but you generally need a min. 10% margin deposit if you contract a forward. You could however lose that if the film doesn’t close and you cannot deliver the currency for the forward contract and the currency moved against you in the meantime. So I wouldn’t recommend doing a forward *before* you have a signed contract for the appropriate funding.

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    • Jeff Steele permalink
      May 23, 2011

      Thank you Florian for clarifying my point: the 10% cost I referenced above is for the margin deposit, not for the forward contract.

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  5. May 20, 2011

    Years ago, dealing with U.S. Studios as investers, we would know that we had (say) 6mil coming in in 12 months, and 15mil coming in eight or fourteen months and so on.

    These dates were locked in and set against milestones in the production process.

    We would offer to sell US dollars ahead of time, when production started, locking in a rate.(As in, “we’ll sell you ten million U.S. dollars in October 2012 if you will pay us XYZ at that time”)

    When I asked the Business Affairs Manager if he thought we were giving away the possibility of a currency gain, his answer was “first, it can as easily go up or down and two, we’re Producers, not speculators”

    I thought that a pretty good stance. We then focused on making a good film rather than be distracted by outside issues.

    Get your budget right, allow sensible exchange rates, hedge right away against future money and get on with the movie.

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    • Jeff Steele permalink
      May 23, 2011

      Sage advice.

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