Question
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
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 |
Given the forecast of the Canadian dollar along with the forward rate of the Canadian dollar, what is the expected increase or decrease in dollar cash flows that would result from hedging the net cash flows in Canadian dollars? Would you hedge the Canadian dollar position?
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