eBook

Royce Co$.$ is a U$.$S$.$ firm with future receivables one year from now in Canadian dollars and British pounds. Its pound receivables are known with certainty, and its estimated Canadian dollar receivables are subject to a $2$ percent error in either direction. The dollar values of both types of receivables are similar. There is no chance of default by the customers involved. Royce's treasurer says that the estimate of dollar cash flows to be generated from the British pound receivables is subject to greater uncertainty than that of the Canadian dollar receivables. Explain the rationale for the treasurer's statement.

The British pound's future spot rate is more difficult to predict as the Canadian dollar is pegged to the dollar.

The British pound's future spot rate is more difficult to predict because of the pound's volatility, therefore, the dollar revenues from the pound receivables are more uncertain.

The statement is incorrect as far as the Canadian dollar receivables are subject to a $2$ percent error while the British pound receivables are known with certainty.

$-$Select$-$IIIIII