British Columbia Hydro
British Columbia Hydroelectric found itself facing substantial foreign exchange losses in 1988 as a result of debt service requirements on large quantities of U.S. dollar denominated debt. The debt originated from the late 1970s and early 1980s when the U.S. dollar had been substantially weaker against the Canadian dollar. The Chairman of BC Hydro, Larry Bell, was now evaluating a number of alternative strategies to protect the provincial utility against further losses associated with this debt.
This case serves as a basic primer on how foreign exchange and interest rate risks may arise simultaneously. It is also useful in teaching introductory principles of financial risk management in which the firm's cost and revenue cash flow structures may be restructured in order to fluctuate in tandem; and at what cost this restructuring may be achieved. Finally, the case highlights the difficulties in practice of attempting to solve risk management problems without taking in consideration issues of legal, accounting, and tax ramifications.