Tucows 2014 Annual Report Download - page 108

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, 2014. 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 Canadian dollar exposure.
At December 31, 2014, 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, 2015 6,720,000 1.0811 (471,428)
April – June, 2015 6,500,000 1.1042 (339,014)
July - September, 2015 6,500,000 1.1282 (217,769)
October - December, 2015 6,500,000 1.1536 (87,594)
Total $ 26,220,000 1.1165 $ (1,115,805)
As of December 31, 2014 the Company has $26.2 million of outstanding foreign exchange forward contracts
which will convert to CDN $29.3 million. Of these contracts, $22.3 million met the requirements for hedge accounting.
As of December 31, 2013 the Company had $26.5 million of outstanding foreign exchange forward contracts which will
convert to CDN $27.8 million. Of these contracts, $20.6 million met the requirements for hedge accounting.
We have performed a sensitivity analysis model for foreign exchange exposure over the year ended
December 31, 2014. 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 year ended December 31, 2014. 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 year ended December 31, 2014 of approximately $2.4 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.
Credit Risk
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