Tucows 2012 Annual Report Download - page 57

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in Canada and sell these services in North America and Europe. Our sales are primarily
made in U.S. dollars, while a major portion of expenses are incurred in Canadian dollars. Our financial results could be
affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets.
Our interest income is sensitive to changes in the general level of Canadian and U.S. interest rates, particularly since the
majority of our investments are in short-term instruments. Based on the nature of our short-term investments, we have
concluded that there is no material interest rate risk exposure as of December 31, 2012. We are also subject to market
risk exposure related to changes in interest rates under our Amended Credit Facility. We do not expect that any changes
in interest rates will be material; however, fluctuations in interest rates are beyond our control. We will continue to
monitor and assess the risks associated with interest expense exposure and may take additional actions in the future to
mitigate these risks.
Although our functional currency is the U.S. dollar, a substantial portion of our fixed expenses are incurred in
Canadian dollars. Our policy with respect to foreign currency exposure is to manage financial exposure to certain foreign
exchange fluctuations with the objective of neutralizing some of the impact of foreign currency exchange movements.
Exchange rates are, however, subject to significant and rapid fluctuations, and therefore we cannot predict the
prospective impact of exchange rate fluctuations on our business, results of operations and financial condition.
Accordingly, we have entered into foreign exchange contracts to mitigate the exchange rate risk on portions of our non-
hedged Canadian dollar exposure. Additionally, we have hedged certain of our Canadian dollar foreign currency
exposures relating to our payroll expenses in Canada. Based on the foreign exchange forward contracts outstanding as at
June 30, 2012, a one cent change in the Canadian dollar to U.S. dollar exchange rates would cause a change of
approximately $1.0 million in the mark to market on our existing foreign exchange forward contracts.
At December 31, 2012, the Company had the following outstanding forward exchange contracts to trade U.S.
dollars in exchange for Canadian dollars:
Maturity date
Notional
amount of
U.S. dollars
Weighted
average
exchange rate
of U.S. dollars Fair value
January – March, 2013 6,000,000 1.0277 193,941
April – June, 2013 5,270,000 1.0300 171,739
July - September, 2013 4,930,000 1.0047 22,820
October - December, 2013 5,480,000 1.0071 24,444
January – March, 2014 5,720,000 1.0095 24,218
April – May, 2014 1,940,000 1.0109 7,620
Total $ 29,340,000 1.0157 $ 444,782
As of December 31, 2012 the Company has $29.3 million of outstanding foreign exchange forward contracts
which will convert to CDN $29.8 million. Of these contracts, $15.1 million met the requirements for hedge accounting
(2011 – NIL).
We have performed a sensitivity analysis model for foreign exchange exposure over the three months ended
December 31, 2012. The analysis used a modeling technique that compares the U.S. dollar equivalent of all expenses
incurred in Canadian dollars, at the actual exchange rate, to a hypothetical 10% adverse movement in the foreign
currency exchange rates against the U.S. dollar, with all other variables held constant. Foreign currency exchange rates
used were based on the market rates in effect during the three months ended December 31, 2012. The sensitivity analysis
indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would result in a decrease in net
income for the three months ended December 31, 2012 of approximately $0.5 million. There can be no assurances that
the above projected exchange rate decrease will materialize. Fluctuations of exchange rates are beyond our control. We
will continue to monitor and assess the risk associated with these exposures and may take additional actions in the future
to hedge or mitigate these risks.