FOR THE EASE OF CALCULATIONS, CONSIDER THERE ARE $360$ DAYS IN A YEAR AND THERE ARE $30$ DAYS IN A MONTH.

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$ and $12,000,000/-$ 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$$50,0007$th March $20196$th June $2019$ India

Yarn C$ $300,0001$st March $201930$th March $2019$ Pakistan

Grade A yarn C$ $1,000,00028$th Feb $201930$th April $2019$ Indonesia

Grade B yarn C$ $200,00024$th Feb $201923$ May $2019$ India

Cotton C$ $550,00018$th Feb $201917$th May $2019$ Pakistan

Grade A yarn $2,000,00015$ Feb $201915$ March $2019$ UAE $($only trade with UAE$)$

Companies export schedule is the following

Export Values Transaction Date Settlement Date Country For the purpose of question#$4$ & $5$ calculations consider following days between transaction and settlement

Denim Jeans US $2,000,0006$th March $20195$st May $2019$ USA $57$ days

Kids clothing $1,500,00021$st Feb $201920$th May $2019$ Spain $72$ days

Garments $5,500,0001$st Feb $201930$ April $2019$ Germany $52$ days

Garments $1,000,0001$st Jan $201914$ March $2019$ UAE $6$ days

Spot rates:

C$ $0\mathrm{.}76/$US$

C$ $1\mathrm{.}7/$

C$ $1\mathrm{.}5/$

Interest rates of different countries are given below:

US$ interest rate$=$i$\_$U$$=3\%$

$$Canadian $ interest rate$=$ i$\_$C$$=5\%$

$$European $ interest rate$=$ i$\_=2\%$

$$UK $ interest rate$=$ i$\_=1\%$

Indian Rupees $($INR Interest rate$)=$ i$\_$INR$=8\%$

Pakistani Rupees $($PKR Interest Rate$)=$ i$\_$PKR$=10\%$

Indonesian Rupiah $($IRH Interest Rate$)=$ i$\_$IRH$=6\%$

Questions:

Q$1$: 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?

Q$2$: Apparently, which internal hedging is used by the firm when it comes to import and export?

Q$3$: 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?

Q$4$: Using money market hedge, how much worth of Canadian Dollars John enterprises will get today against its exports. Remember, current date is different then the transaction date.

Q$5$: Using forward market hedge what would be the proceeds in C$ from exports.

Assume current date is $8$th March $2019$ and yield curves are flat