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.