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Long Life Enterprises was a well established Toronto based company engaged in the importation and wholesale marketing of specialty grocery items originating in various countries of the western Pacific Rim. They had recently also entered the high risk business of exportation, to several of these same countries, of fresh Atlantic lobster and crab.

Although Canada has extensive trading relationships with several countries in the Pacific Rim, these transactions were not normally priced or settled in terms of the Canadian dollar. Both the U.S. dollar and the Japanese yen were somewhat more common in these transactions. Further, various local currencies were involved, especially for small transactions involving specialty items, and a wide variety of credit terms were in use for both imports and exports. The entire situation was complicated by the perishable nature of some of the imports and the high mortal ity risk for both lobster and crab. Both situations led to uncertainty as to the face amount of the associated receivable or payable and hindered the ability of the firm to adopt the policy of specific hedging of each of the receivable or payable contracts.

Most recently, the Canadian dollar had risen against other major currencies, leading to major losses on the large receivables outstanding because of the seasonal lobster harvest. More generally, management was concerned about losses that might arise from both export and import transactions.

For the most recent fiscal year, foreign currency losses had exceeded gains by some $40,000—an amount the company could not afford during the present stage of rapid growth.

Required:

What steps would you propose to the management of Long Life Enterprises to reduce the foreign exchange costs associated with their receivables and payables? As a part of this process, suggest a way of structuring transactions or affairs that would reduce the impact of fluctuations in the relative values of currencies.