The Role of Forex in Sponsorship Deals and Entertainment Partnerships

If we are to speak of the sponsorship deals especially in the entertainments industry, what comes to mind is big brands associating with big moves such as for example the sports teams, musical tours and even movies.

But what if I told you that foreign exchange (Forex) – the buying and selling of currencies – has a big role to play in these partnerships?

It is not limited to choosing a right sponsor; it also involves how currency fluctuations can affect the deal in future.

In Sponsorships, Why Does Forex Matter?

Forex is the buying and selling of one currency for another.

Think of a huge stock exchange where you can swap dollars for euros, or Japanese yen for British pounds, etc.

The value of each currency varies daily depending on politics, economy and or other world incidences.

All these changes impact on the kind of services offered by the entertainer or the kind of benefits received by the commercial sponsor in their deals.

For instance, a US sponsor will commit to sponsor a particular amount of money for a project such as €1 million and the euro losses its value regarding the dollar.

It can make a big difference in international deals if one is patient enough to wait for the information to come by.

The Effect of Currency Fluctuations

Currency fluctuations can affect sponsorships in two ways:

Deal Value: If one currency goes up or down, the overall value of the sponsorship changes. A drop means the sponsor pays less, a rise means the deal is more expensive than expected.
Risk for Both: Both the sponsor and the entertainment company face unexpected costs. Sponsors may not want to commit to long term deals if they expect a drop in currency value. Entertainers may worry that their payment will be less than expected if their local currency falls.

How Do Companies Manage Forex Risk?

To avoid these surprises, companies use something called “currency hedging”.

This means they can fix a currency rate in advance so they know exactly what they’ll pay or get no matter how much the currency value changes.

This is like buying something today and agreeing to a fixed price even if the price goes up in the future.

There are different ways to hedge:

Forward contracts: These allow companies to agree on an exchange rate for a future date. If the rate changes, the deal won’t be affected.
Options: These give the company the right but not the obligation to exchange currencies at a certain rate.

Hedging can mitigate risk but it comes at a cost. For smaller sponsors or entertainment companies this might not always be an option.

Real-Life Example: Forex in Sports Sponsorships

In sports, Forex affects the game. Take Formula 1 sponsorships where teams sign deals in multiple currencies.

For example a team sponsored by a UK company might get paid in pounds, while the team’s expenses (travel, equipment, salaries) might be in euros or US dollars.

If the pound drops against the euro the sponsor gets less value for their money and the overall budget is impacted.

Another example is the International Champions Cup (a global football tournament).

Many of the sponsorship deals are negotiated in US dollars but the teams participating are from different countries.

This creates huge swings in deal value if the exchange rates are not stable.

Forex and Entertainment Partnerships

Forex isn’t just for sports. It’s also relevant in other entertainment sectors like music tours or film production.

Imagine a US pop star goes on tour in Europe and has sponsors in both the US and Europe.

If the dollar strengthens it could make it more expensive for European sponsors and impact the deal structure.

In film production if a UK production company is making a movie with international backers they may face issues if the exchange rate moves significantly during the production process.

They could end up to invest in raw materials, location costs and even actors’ salaries.

Tips for Managing Forex Risk in Sponsorships

Know the Currency Exchange Rates: Before you sign a sponsorship agreement make sure both parties understand the impact of currency exchange rates on the deal.
Hedge: Use hedging strategies to lock in a good exchange rate and protect against sudden changes.
Be Flexible: If possible negotiate terms that allow for adjustments based on currency fluctuations. For example if the exchange rate moves by 10% the deal terms can be re-negotiated.
Think Long Term: Currency fluctuations affect short term deals but long term sponsorships need more planning. Use financial instruments like options to protect long term commitments.

Conclusion

Forex is more relevant in sponsorships and entertainment partnerships than you think.

Currency fluctuations affect deal value and financial stability.

Whether you’re a sponsor or an entertainer, be aware of these risks and make informed decisions.

Always think of the exchange rates and hedge if you can.

Author Profile

Adam Regan

Deputy Editor

Features and account management. 3 years media experience. Previously covered features for online and print editions.

Email Adam@MarkMeets.com