Saturn Industries sells its products under a licensing agreement to many parts of the globe. Under the
Question:
Saturn Industries sells its products under a licensing agreement to many parts of the globe. Under the terms of an agreement reached with a German company, a payment for Saturn's services is due in one year for 1 million euros. There is some concern over the value of the euro in one year, as the Canadian dollar has been strengthening.
The spot rate is 1.3805 Canadian dollars for one euro, but the one-year forward rate is 1.3676 Canadian dollars for one euro. Currently, interest rates are 3 percent in Canada and 4 percent in Germany for one year. There is also a belief within the firm that the spot rate in one year will be 1.3825 because the euro is due to get stronger.
a. Outline the various options available to Saturn Industries to handle its foreign exchange exposure.
b. Make a recommendation.
Step by Step Answer:
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta