JanaeCo is a U.S. firm conducting a financial plan for the next year. It has no foreign
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Question:
JanaeCo is a U.S. firm conducting a financial plan for the next year. It has no foreign subsidiaries, but more than half of its sales are from exports. Its foreign cash inflows to be received from exporting and cash outflows to be paid for imported supplies over the next year are shown in the following table:
Currency | Total Inflow | Total Outflow |
Canadian dollars (C$) | C$32,000,000 | C$2,000,000 |
New Zealand dollars (NZ$) | NZ$5,000,000 | NZ$1,000,000 |
Mexican pesos (MXP) | MXP11,000,000 | MXP10,000,000 |
Singapore dollars (S$) | S$4,000,000 | S$8,000,000 |
The spot rates and one-year forward rates as of today are:
Currency | Spot Rate | One-Year Forward Rate |
C$ | $ .90 | $ .93 |
NZ$ | .60 | .59 |
MXP | .18 | .15 |
S$ | .65 | .64
|
Required:
- Based on the information provided, determine the net exposure of each foreign currency in dollars.
- Assume that today's spot rate is used as a forecast of the future spot rate one year from now. The New Zealand dollar, Mexican peso, and Singapore dollar are expected to move in tandem against the U.S. dollar over the next year. The Canadian dollar's movements are expected to be unrelated to the movements of the other currencies. Since exchange rates are difficult to predict, the forecasted net dollar cash flows per currency may be inaccurate. Do you anticipate any offsetting exchange rate effects from whatever exchange rate movements do occur? Explain.
- Given the forecast of the Canadian dollar along with the forward rate of the Canadian dollar, compute the expected increase or decrease in dollar cash flows that would result from hedging the net cash flows in Canadian dollars and advise if you hedge the Canadian dollar position.
- Assume that the Canadian dollar net inflows may range from C$20,000,000 to C$40,000,000 over the next year. Explain the risk of hedging C$30,000,000 in net inflows, and suggest ways in which JanaeCo can avoid these risks.
Related Book For
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
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