Saturday, November 26, 2005
The Crazy-Like-A-Fox Contract Of B.J. Ryan
That's the exchange rate for the Canadian dollar versus the U.S. dollar. The Ryan deal makes a lot more sense if you think of it as a currency arbitrage. Notice how the Canadian dollar has gained 30% over the last three years? A big reason for that is easily accessible oil and natural gas resources in the U.S. are on the decline, while Canada still has large supplies of natural gas, large (but also dwindling) supplies of oil, and a simply staggering amount of non-conventional oil in the form of the Athabasca tar sands. So there's plenty of reason to think this appreciation will continue for some time. If your customers pay you in Canadian dollars, and you pay your employees in U.S. dollars, that's a big deal; it's essentially the same as a 9% compounded annual discount on employee salaries no other club gets. Is the Ryan contract expensive? In years, definitely; in dollars, not hardly.
You've got this backwards. Yes, the Canadian $ is up against the US $. It's not only because of the gas/oil thing you quote, it's also because the US $ has been in the tank against almost all major currencies for a couple of years.
Also, there's no "discount" here -- $47 million US is $55 million Canadian. How is that a discount? To me, it appears to be a premium.
(For technical traders - the long-term trend IS up, but it's "momentum" is down - not an easy market to trade in right now)
I think the flip side would be: what if the Canadian $ reverts back down to .65-.70ish? The contract WOULD look pretty bad, except...
I am certain that the Jays have spent YEARS agonizing over this dilemma. I wouldn't be surprised at all if they hedged their bets via the commodity markets (that IS why futures/options were invented in the first place). Option premiums act like "insurance" against any adverse market conditions; I believe it is the cost of doing business as a foreign team. "Relatively" inexpensive, but that way the Jays are protected whether Rob is right or wrong :)
$47 million is $47 million...that's a lot of dough.
Wouldn't they be better off giving that money to Burnett?
I could only imagine what KROD will get in arbitration now...
A better way to look at it is this:
The contract is at $55M CAD today. But if the Bluejays had sign a $55M CAD contract at $.65 USD/CAD, it would be equivalent to a $36M USD contract. A better discussion would be "Is BJ Ryan worth $7M/year?" To sum it up, appreciation of CAD increased the Bluejay's purchasing power. So GREAT point Rob!
And to the technical analyst's point, exchange rate (especially short-term) is determined by cross-border capital flows, not a graph.
My earlier point was: The Canadian $ rising is no sure thing. Will it? Maybe. But nobody knows - not Rob, not JP Ricciardi, or anyone else.
Rob DOES make a good point. There's just more to it than meets the eye - i.e., the Canadian $ CAN go down, too, over the next several years (I don't believe they are giving Ryan a one-time lump sum payment!). And the Jays BETTER have a backup plan for that possibility.
Currency options are EZ - it is not arbitrage, nor do they require knowledge of the entire Canadian economy. It is a simple hedge, something most people do every day with their own portfolios (in other ways, of course). If I ran a $100M+ international enterprise, I need to have (or better, know someone who has) some knowledge of international economics, currency, and futures. Something. Anything, so I don't lose my shirt if the exchange rates go haywire (for whatever reason).
btw - you know who would have that kind of mind? Bill Stoneman...
And, finally, YES - the question still comes down to, no matter what, is Ryan and his 70 innings worth ANY of these dollar figures?
Good work, Rob - you got everybody going :)