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How can a contract be worded for sales rep and company to minimize loss of money through exchange rate?

By Gord Ahier |

Shawn asked:

I am currently in talks with a potential sales rep in the U.S. I plan on offering a straight commission on net sales and incentives. With the Canadian dollar up and down, how could I word that in a contract so both parties are not losing through dollar exchange rates?

Gord Ahier answered:

The question boils down to the risk that you are willing to assume. As the Canadian Company paying a commission to a US Sales rep, I assume your concern relates to your exposure to fluctuations in the US dollar if you pay your sales rep in US dollars. In essence you would like to hedge the currency so that your exposure is minimized. The down side of this position is that you lose the ability to benefit from currency fluctuations that work in your favour.

The hedge can take a couple of forms:
A common technique is to purchase forward contracts that allow you to buy US dollars in the future at a fixed currency rate. This may be difficult if you do not know the quantum of US dollars that you will require.

If you have US dollar sales so that you are receiving funds in US currency, you could have your payments made from those US dollars effectively mitigating the currency fluctuations since you have US dollars to settle the payments to the rep.

I have also seen situations where you have a currency sharing arrangement where you negotiate the exchange rate that you will use to settle the contract. In other words you determine the variance in the exchange rate that you will use to settle the payment. If the US dollar strengthens by 5 per cent, you agree that you will only factor in an exchange rate of say 2.5 per cent. In this situation you are effectively measuring the contract in Canadian dollars subject to a predetermined exchange rate to determine the quantum of US dollars to be paid.

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