Exchange Risk Management

Vogl Co. is a U.S. firm creating a financial plan for the next year. It has no foreign subsidiaries, but more than half of its sales come 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$32,000,000
New Zealand dollar (NZ$)	NZ$5,000,000	NZ$1,000,000
Mexican peso (MXP)	MXP11,000,000	MXP10,000
Singapore dollar (S$)	S$4,000,000	S$8,000,000

The spot rates and one-year forward rates as of today are shown here:

CURRENCY	SPOT RATE	ONE-YEAR FORWARD RATE
C$	$0.90	$0.93
NZ$	0.60	0.59
MXP	0.18	0.15
S$	0.65	0.64

Assume that the Canadian dollar net inflows may range from C$20 million to C40 million over the next year. Explain the risk of hedging C$30 million in net inflows. How can Vogl Co. avoid such a risk? Is there any trade-off resulting from your strategy to avoid that risk?