The Bank of Canada today reported the results of its latest survey into foreign exchange hedging by Canadian firms.

It says that banks reported increases in the percentages of Canadian companies that they considered to be either experiencing a very negative or a very positive direct effect from the appreciation of the Canadian dollar.

However, banks also reported that many firms continued to be shielded from the stronger Canadian dollar to differing degrees by a combination of natural and financial hedges. “The most important factor cited by respondents behind this apparent resilience to the appreciation of the Canadian dollar was the natural hedge afforded by rising commodity prices. The importance of commodity prices as a natural hedge had been cited repeatedly by respondents in all previous surveys,” it notes.

The banks also reported that the degree of financial hedge coverage and the average term of hedges targeted by U.S.-dollar sellers had continued to decline.

Finally, while the majority of firms that hedge using options were reported to still prefer simple structures, a gradual increase in the use of more exotic structures as well as some new corporate users of options as hedges were reported.

It reported that several new trends in options use began to emerge in 2007: more firms were choosing to undertake more complex option strategies; there was more use of participatory option structures which also act as protection for Canadian dollar buyers against extreme currency moves; and, for the first time since the survey has been conducted, there were reports of a noticeable interest by commodity producers (excluding the oil & gas sector) in option strategies to address their currency exposures.

The latest survey was sent to 11 banks in late May of 2007, and the Bank followed up with individual meetings in June with the respondents. The institutions participating in the survey include: Bank of America, Bank of Montreal, CIBC World Markets, HSBC (Canada), JPMorgan Chase (Canada), National Bank of Canada, RBC Capital Markets, Scotiabank, Société Générale (Canada), State Street (Canada), and TD Bank.