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Foreign Exchange Meets the Entertainment Industry

There are few industries in the world with as much star power, financial backing, and glitz and glamour as the entertainment business, or, as it is called in Hollywood, “The Industry”. There is a type of film for just about every type of person: some moviegoers appreciate a well-written screenplay, others enjoy special effects and still others just like to see Harrison Ford and Julia Roberts for their natural beauty on the silver screen. We love our stars and we love to go to the movies; world-wide box office figures and video/DVD rental numbers prove that the world is hooked on films.

Behind every film an enormous engine is driving the process, and it all begins with the financing package. There are many forms of film financing, from studio-backed blockbusters to small, independent features that are shot for a fraction of the cost and are often financed with credit cards or loans from family and friends. And for as many ways that a film can get capital backing, there are an equal number of banks, financial institutions, insurance companies, and individual investors who can help get a film financed. However, when filming abroad, it is important to consider working with experts who understand the intricacies of entertainment finance and foreign exchange.

Filming Abroad

As Hollywood tries to minimise the skyrocketing costs of moviemaking, studio executives are increasingly looking to foreign countries for location shoots. In many cases it is financially wise to film in a foreign country due to the strength of the US dollar versus the local currency. To pave the way for Hollywood to shoot abroad, some foreign governments offer incentives for studios to film in their country. However, before making the decision to film abroad, it is important to understand the foreign exchange aspect of film financing.

Forex Exposure

Production companies and studios bear the greatest FX exposure when filming in foreign countries. As expenses are incurred in different parts of the world, executives rely on FX experts to track currency exchange rates and other global financial matters that may tip the fragile balance in currency markets ‘ all the while, corporate Hollywood continually scrutinises the budget to avoid cost over-runs.

Entertainment companies typically budget the total cost of a film long before a single frame is shot. This amount is approved by the corporation and its lenders, which could be the traditional financier or a joint venture of investment groups and foreign interests, facilitated by a financial institution. The film’s director may disagree with producers and writers on issues of artistic integrity and creativity, but in the end it is the production manager’s responsibility to stay within the budget and understand ‘ with the help of advisors ‘ the local currency market.

When filming abroad, the production company ‘ apart from the main talent and crew ‘ will incur expenses that must be paid with local currency. In most cases this is a benefit to the local economy. In this situation, film companies typically utilise forward contracts. The production company can provide a monthly foreign currency remittance schedule based on pre-determined salaries, expense payments and financing requirements. A conservative company will lock in forward contracts based on the most current exchange rate: the forward rates are immediately priced for each monthly payment.

For example, utilising the foreign currency amounts and the forward rates, an American film production company can calculate up front the value of monthly foreign currency payments in US dollars. Naturally, entering into forward contracts means that regardless of where future fluctuations are in the exchange rate, the forward rates stand firm and therefore are not affected by currency markets.

Some less conservative companies may wait for a period of time for better levels to lock in their forward rates, but it is very unusual for anyone to keep their exposure unhedged for longer than a month, since that would be considered “taking a position” when the film budget is already approved.

Filming in Canada

For almost a decade, Canada has been a favourite spot for television and film producers. Shows such as Fox’s X Files and hundreds of made-for-television movies and feature films have been filmed on Canadian soil.

Over the years, FX specialists have noted some interesting trends in the cross-border flows of entertainment money that may have led to the explosion of production in North America. The Canadian dollar has been weak and is regarded by many still to be undervalued. The US dollar buys about C$1.4900 as of mid-August 2000, a figure that is expected to remain between a range of 1.4600-1.5000 until the end of the year.

When contrasting the Canadian economy with the possible slowdown in the US, many foreign exchange specialists believe that the Canadian dollar will eventually strengthen to 1.4000 ‘ close to a 7% rise in C$. Many firms are therefore now taking advantage of the weak Canadian currency.

Additionally, to encourage investment in the country and its labour force, Canada offers a unique tax incentive programme for foreign production companies to film within its borders. The country’s geographic proximity to the US, and the lack of a language barrier between the two nations, is a success factor for both the Canadian government and film production companies.

By taking advantage of exchange rates, a trend is emerging among US film companies that partner with French and German concerns to produce films in Europe. The German law offering tax breaks for local film production has also contributed to a rise in US film investments by German companies. The French have also made significant investments in Hollywood because of favourable rates of exchange.

Financial lenders in the US must work closely with their foreign exchange advisors to manage risk. Very few banking institutions have in-house film financing experts and foreign exchange advisors who understand the film industry and its idiosyncrasies.

Since the US dollar is currently strong against most major currencies (with the exception of the Japanese yen), American production companies should enjoy significant savings when filming abroad. The bottom line: there is minimal FX risk as long as the company has locked in forward contracts.

By Tomoko Iwakawa, vice president and foreign exchange advisor, and Joseph Woolf, senior vice president and manager of the Entertainment Finance Division, both of Union Bank of California, N.A.

Profit & Loss

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