1

Introduction
Clearwater Seafood was a seafood exporting firm which suffered from a decline in sales
revenue due to the appreciation of Canadian dollars and other business risks. As a result, the
company failed to distribute dividends under income trust. The company had to hold a
conference for shareholders and adjust its strategy to tackle such problem it faces.
In the first part of this report, both exchange rate risk and business risk will be illustrated
according to its financial performance and operating process. The second part includes any
recommendation in my point of view.

Foreign Exchange Risk

Foreign exchange risk is the risk of an investments value changing due to changes in
currency exchange rates. Foreign exchange risk can be divided in to three types which are
translation, transaction and economic risk. Translation risk occurs from the potential loss due
to the moment when foreign currency is transferred into home countries currency.
Transaction risk is the risk of adverse exchange rate movements occurring in the course of
normal international trading transactions. The economic risk is the effect of exchange rate
movements on international competitiveness.
For transaction risk, lets concentrate on the sales revenue and the exchange rate in
corresponding period. From Appendix 1, we can conclude that US dollar and Japanese Yen to
Canadian dollar value decreased since 2002, and Euro to Canadian dollar decreased sharply
since 2004. In the same period, as shown in Exhibit 5, Clearwaters sales revenues in US
dollar decreased from $205,000 in 2003 to $183,400 in 2004 and $146,000 in 2005. The sales
revenue in Japanese Yen saw the similar picture. In 2003, the sales revenues were $33,000,
but then it decreased to $28,000 in 2004 and to $26,000 in 2005. In all, accompanied with the
appreciation of Canadian dollar, significant lower profits generated from foreign markets led
to the decreases in the total sales revenue, from $350,000 in 2003 to $345,000 in 2004 and
$315,000 in 2005. As shown in Appendix 2, over 80% of Clearwaters revenue was from
transaction with foreign currencies, so the firms revenue can be considered significantly
influenced by the appreciation of Canadian dollar in this period.

Figures in Exhibit 8 can confirm the translation risks. The foreign currency translation cost
fluctuated from 2003 to 2005, which was $1.443m, $3,006m, and $1.236m in specific. An
abnormally high translation cost can be observed in 2004. Translation costs may not have
linear relationship with exchange rate, but they indicates the fluctuation of exchange rate
which may create extra risk when constructing sales or cost budget to make future risk
hedges.
Economic risk refers to the competitiveness in international market. In this case, the
exchange rate of USD and Euro to Canadian dollar played the main role. The companys
international competitiveness was obviously weakening because USD was depreciating
gradually. Not only the revenue converted to Canadian dollar, but also the sales revenue in
American market was shrunk. Take the end of 2005 for example, the company had $62
million and Euro 12 million contracts respectively, which meant that every one-cent change
in exchange rate of US dollar and Euro to Canadian dollar would trigger US$505,000 and
Euro 285,000 fluctuation in sales and gross profit. That is quite a lot considering the
companys whole sales and profits.
The company did implement an active foreign exchange risk management scheme through
forward contracts and options. 50% of the cash flows were hedged by forward contracts,
which can provide certainty in exchange rates in 12 months or longer. Also, it sold call
options. If options were exercised, the company could make the transaction under a predetermined exchange rate. Nevertheless, only 50% of cash flows can be covered by the
forward contracts. Moreover, the short position of call option also would brought about extra
risks if the value of home currency moved to an unexpected direction. Such potential loss
could be infinite. Also, $22.5 million unqualified forward contract was a high-risky factor.

Business Risk
1. Need stable funds to support its strategy against competitors
This kind of risk can be categorised to strategic risk in business risk. The company mainly
has three core strategies to maintain its competitiveness against peer companies: innovation,
management of value chain and diversity of products. They are all driven by not only a great
quantity, but also stable funds in every period. For instance, the cutting-edge technologies
are supported by edged equipment and high-quality research groups. To hire an expertise and

maintain the equipment require enormous cash inflow every year. Similarly, the management
of value chain also needs managers with high salary costs. On the other hand, to diversify
products requires a large number of cash inflows in one period. Digging new produce species
and entering new markets costs a lot, including installation cost, cost from political barriers,
discount costs to beat local competitors and so on. Unfortunately, as mentioned above, due to
the fluctuating exchange rate of other factors, its profits are not stable and sufficient enough.
It is doubtful that its core strategy can be implemented as expectation. A future decline in
sales revenue can be expected, following the failure of strategy.
2. The risky value-added processing in different countries
Value-added processing is a customer driven process which produces products in a manner
that enhances its value. It can bring more risks for Clearwater when it is applied in various
countries. There are 23 offshore harvesting vessels owned by Clearwater. Clearwater has
offices in China, the United States, the United Kingdom, Japan and Argentina, which apply
their own strategy and follow different logistics according to local conditions. Four
distribution hubs are located in London, Brussels, Louisville and Halifax. The company
defines the value added process as which is related to produce fresh, high quality and variety
of products to satisfy customers in different countries with efficient distribution.
Theoretically, diversity of market may significantly increase uncertainty of such process. Any
change in this business cycle can result a big problem. For example, a change in price of any
raw material in any countries may force the company to reconstruct its operating process.
Any change of local customers preference may influence the companys revenue in these
countries. A new entrant into the market or a change of local governments politics may make
the value-added process inefficient. In all, the flexibility of operating process makes the
monitoring more costly and it is more likely not to be in accordance with the companys
whole strategy.
3. The risks derived from the nature of product
The seafood harvesting plays a vital role in Clearwaters business because it is the base of
sufficient resources supply. Nevertheless, the seafood harvesting is seasonal in nature. As a
result, the transactions are more frequent in the second half of each year which may bring
about a liquidity risk. Also, a change in climate or natural environment can impact the quality

and quantity of fishery. As long as the resources supply is influenced, the whole business
process and value chain is uncertain.
4. Political risks from Canadian government
The industry is regulated by the Department of Fishery and Oceans (DFO). They determine
the firms volume and species to catch and quotas for every company. The regulators are
likely to cut down the companys quotas or reduce the total allowable catch amount due to the
decreasing amount of some species. Any change in TAC is a risky factor.
5. The uncertain future of the whole industry.
Recent years have seen an increasing number of people realizing the importance of ocean
protection. Hazard risk may emerge due to the exploiting ocean resources. It is entirely
possible that the range of fish catching may be limited because of both the pollution and
ocean protection. On the other hand, however, people also realize the nutritional value of
seafood. Farmed fish could be preference. More risks will ensure when the company modifies
its industrial structure.

Suggestions to reduce foreign exchange risks

Before 2003, the company benefited from the weak Canadian dollars, but after Canadian
dollar started to appreciate in 2003, its revenue followed an unfavourable trend. The pervious
hedge strategy may not be applicable anymore. Nevertheless, according to Exhibit 10, no
change in its foreign exchange management was made.
As the Canadian dollars appreciation is expected to last for further years, the company can
put more funds into the short position of put contract, which is at an appropriate level to
avoid too many risks. If it is possible, the company can encourage the institutional customers
to purchase products in Canadian dollar to limit currency risks. Moreover, the company can
match receipts with payments in one currency by controlling the volume of trading. Similarly,
asset and liability matching is also a choice. By analyzing the duration of assets and
liabilities, the company can match the amount of inflow of assets and debt payment to offset
the costs from exchange rates. Finally, the strategy of leading and lagging deserves to be

utilized. It refers to getting receipts early and making payment late when the Canadian dollar
is less valuable and is expected to appreciate and vice versa.

Suggestions to reduce business risks

Firstly, considering the diversity of products and markets involved, a centralized operating
structure may not be a good one. Each part of the firms value chain and value-added
processing is totally different and cannot be well-managed under a centralized structure. It is
better to implement a decentralized organisational structure. Under such structure, sales
budget, motivation plan and business strategies are set separately to reflect the local
conditions. Moreover, the dividend payment system with income trust should be adjusted. To
benefit the firm in long term by generating higher capital gain, dividend payment should be
decided by CEO instead of by monthly binding.
Secondly, the company is recommended to focus more on producing high-value seafood to
more profitable markets, rather than continue to expand its product categories. In Appendix 4,
scallop is the species with best performance which deserves more concentration. Also in
Appendix 3, US market accounts for about 50%. As US market has no significant advantage
on seafood consumption over other countries, the company should pay more attention to
some emerging markets, such as China which has more potential. The sales in China only
contribute for 1.8% during 2005, which are too little.
Thirdly, to invest in some insurance is a good idea. As mentioned before, because of the
nature of its resources, a sudden change in climate or environment can cost the company a
lot. Purchasing some insurance on it can prevent the company from a disaster.
Fourthly, the firms innovation and edged technologies is its core competitiveness which the
company should keep investing on. Acquisition is a considerable way to maintain such
advantage. The level of tariff, exchange rate and local policy should be taken into
consideration when determine the company to acquire.
Finally, with the TAC quota, the company should not receive all TAC, but find out the
profitable one, for example, scallops to invest. According to Appendix 4, scallops are the
most profitable part. However, the TAC allocations on sea scallops and argentine scallops are
48.7% and 50% respectively which is significantly lower than that of lobster which is 87.5%.

Appendix 1

Canadian dollar/foerign currencies)

3
2.5 2.37
2

2.46

2.38

1.51
1.5 1.57

1.62
1.46

1.61
1.38

1.48
1.31

0.01
2003

0.01
2004

0.01
2005

2.19

1
0.5
0 0.01
2002

USD

JPY

Eur

GBP

Appendix 2

Percentage of sales in foreign currencies

70.00%
60.00%

USD

50.00%

JPY
Eur

40.00%

GBP

30.00%

other

20.00%
10.00%
0.00%

2002

2003

2004

2005

Appendix 3

Sales by Geography
40.00%
30.00%
20.00%
10.00%
0.00%

2003

2004

USA

Canada

Europe

China

Aisa

Others

2005
Japan

Appendix 4

Sales by Species
40.00%
30.00%
20.00%
10.00%
0.00%

2003

2004

scallops

lobster

clams

shrimp

crab

others

2005
ground fish