5 Vogel recognizes that its year-to-year hedging strategy hedges the risk only over a given year and does not insulate it from long-term trends in the Canadian dollar’s value. It has considered establishing a subsidiary in Canada. The goods would be sent from the United Kingdom to the Canadian subsidiary and distributed by the subsidiary. The proceeds received would be reinvested by the Canadian subsidiary in Canada. In this way, Vogel would not have to convert Canadian dollars to pounds each year. Has Vogel eliminated its exposure to exchange rate risk by using this strategy? Explain.

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Vogel Ltd is a UK 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 dollar (C$) C$32 000 000 C$2 000 000 New Zealand dollar (NZ$) NZ$5000 000 NZ$1.000.000 Mexican peso (MXP) MXP11 000 000 MXP10 000 000 S$4 000 000 S$8 000 000 Singapore dollar (S$) The spot rates and one-year forward rates as of today are shown below: Currency Spot Rate One-Year Forward Rate C$ 0.60 0.63 NZ$ 0.40 0.39 MXP 0.14 0.12 S$ 0.42 0.41