The Loonie Is Driving NHL Players CrazyIssue 02-15-16 |
The collective bargaining agreement between the National Hockey League (NHL) and its players stipulates that league revenue is split 50-50 between owners and players. Given some uncertainty over revenues, a percentage of each player's salary is held in escrow until overall revenues are known at the end of the season. This year, however, the holdback had to be increased due to the declining Canadian dollar.
While all salaries are negotiated in U.S. dollars regardless of where the player is located, about a third of league revenue is earned in Canadian dollars from the franchises, sponsorships, and broadcast rights in Canada. With the changing exchange rate, league revenue will be lower once the Canadian revenues are converted to U.S. dollars. Fortunately for the league and its owners, the collective bargaining agreement means that the league will also be able to lower its labor costs, passing along some of the exchange rate risk to players. Canadian franchises have purchased exchange rate hedges that will help them minimize the effects of the exchange rate change, but many of those hedges are now about to expire.
Some students easily grasp the implications of exchange rate changes on the reported revenues and profits of multinational companies, while other students struggle. This fairly simple two country example with a one-third/two-thirds split in revenues allows a faculty member to fairly easily show how exchange rate changes can impact firms and employees.