Foreign Transactions and Decisions The Gilbert Company has received a bid from a Canadian supplier to furnish the raw materials the company uses in manufacturing one of its major product lines. The price quoted is 16.50 Canadian dollars per unit. Gilbert currently purchases the raw materials from a U.S. supplier and pays only $12.50 per unit.

a. If the exchange rate between the United States and Canadian dollars is C$1.36 to $1, is the raw material cheaper if purchased in the United States or in Canada? By what amount?

b. Would your answer change if you discovered that the 180-

day forward rate for Canadian dollars is C$1.40 to $1?

Why?

c. Having generated a numerical answer to the question of where to buy raw materials, are there other factors that should be considered in making this decision? What are the implications of purchasing raw materials in a foreign country and importing them into the United States? Identify as many factors as you can. How do these factors affect your decision? What would be the impact of moving the manufacturing process to Canada?

d. What are the possible implications of political unrest in Canada? What would happen if your supplier is in Quebec and the province votes in favor of the separation of Quebec from Canada? Would political unrest change the currency exchange rate? Would you benefit or lose?