Case Study:

You are a CFO of John Enterprises, a firm which is engaged in import and export of garments with different countries. Usually they import raw materials especially from India, Pakistan and Indonesia and process those Martials to produce finished goods and export to USA and European countries. Their import LC are always opened in CAD$ and their export invoices are generated in US$ or Euro. Their annual import is around C$20,000,000 and their exports are worth of $45,000,000 and12,000,000/- to USA and European counties, respectively. Exchange rate between C$ and U$, C$ and Euro are usually stable. However, exchange rate between C$ and India, Pakistani and Indonesian rupees are quite volatile, as these currencies apparently depreciate against Canadian Dollars.

To support its production John Enterprises are importing following materials from different countries:

Import commodity

Values

Transaction Date

Settlements Date

Country

Cotton

C$50,000

7^thMarch 2019

6^thJune 2019

India

Yarn

C$ 300,000

1^stMarch 2019

30^thMarch 2019

Pakistan

Grade A yarn

C$ 1,000,000

28^thFeb 2019

30^thApril 2019

Indonesia

Grade B yarn

C$ 200,000

24^thFeb 2019

23 May 2019

India

Cotton

C$ 550,000

18^thFeb 2019

17^thMay 2019

Pakistan

Grade A yarn

2,000,000

15 Feb 2019

15 March 2019

UAE (only trade with UAE)

Companies export schedule is the following

Export

Values

Transaction Date

Settlement Date

Country

Denim Jeans

US 2,000,000

6^thMarch 2019

5^stMay 2019

USA

Kids clothing

1,500,000

21^stFeb 2019

20^thMay 2019

Spain

Garments

5,500,000

1^stFeb 2019

30 April 2019

Germany

Garments

1,000,000

1^stJan 2019

14 March 2019

UAE

Spot rates:

C$ 0.76/US$

C$ 1.7/

C$ 1.5/

Interest rates of different countries are given below:

US$ interest rate== 3%

= 5%

= 2%

= 1%

Indian Rupees (INR Interest rate)== 8%

Pakistani Rupees (PKR Interest Rate) == 10%

Indonesian Rupiah (IRH Interest Rate) == 6%

Questions:

Q1: Quantify the foreign exchange exposure of John Enterprises. Is John's FX exposure and risk equal to each other, if not then provide the reason?

Q2: Apparently, which internal hedging is used by the firm when it comes to import and export?

Q3: What if your analysis suggests that Canadian dollar will greatly depreciate against US$, Euro and GBP in next few weeks and remain at new level for quite some time. Which internal hedging technique will be appropriate in that situation? Also, if your firm does not have resources would you benefit from having forward hedge?

Q4: Using money market hedge, how much worth of Canadian Dollars John enterprises will get today against its exports.

Q5: Using forward market hedge what would be the proceeds in C$ from exports.