Zanussi exports financing. The Italian manufacturer of household appliances Zanussi is exporting dishwashers to Canada and extending 180 days credit to its Canadian wholesaler. The exports proceeds are denominated in Canadian dollars (CAD) and are worth CAD 24 million. To finance its working capital, Zanussi is investigating several financing sources: Banco di Roma would finance the deal in euros at an annual interest rate of 6 percent; Canadian Imperial Bank of Commerce, a leading Canadian commercial bank, would extend a loan at an annual rate of only 4 percent. Forward CADs are selling at a premium of 2. 25 percent (on an annual basis vis-à-vis the euro) to the spot rate of €1 = CAD 1. 31. The Eurodollar market could finance the loan in US$ at an annual rate of 3 percent. Finally, forward dollars are selling at a premium of 3. 5 percent vis-àvis the euro with a spot rate of €1 = US$1.33.

a. What is the nature of Zanussi’s exposure to risk(s) before financing is taken into account? How could it/they be hedged?

b. How can € or CAD financing be combined with hedging? Which currency offers the cheaper financing?

c. What would be the rationale for financing exports to Canada in US$?

d. What are the additional risk(s) incurred by Zanussi? Can it/they be hedged?

e. How should the transaction be financed?