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$50,000 7 th March 2019 6 th June 2019 India Yarn C$ 300,000 1 st March 2019 30 th March 2019 Pakistan Grade A yarn C$ 1,000,000 28 th Feb 2019 30 th April 2019 Indonesia Grade B yarn C$ 200,000 24 th Feb 2019 23 May 2019 India Cotton C$ 550,000 18 th Feb 2019 17 th May 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 For the purpose of question 4 5 calculations consider following days between transaction and settlement Denim Jeans US 2,000,000 6 th March 2019 5 st May 2019 USA 57 days Kids clothing 1,500,000 21 st Feb 2019 20 th May 2019 Spain 72 days Garments 5,500,000 1 st Feb 2019 30 April 2019 Germany 52 days Garments 1,000,000 1 st Jan 2019 14 March 2019 UAE 6 days Spot rates C$ 0 76 US$ C$ 1 7 C$ 1 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 Q1 Quantify the foreign exchange exposure of John Enterprises Is Johns 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$, Euro and GBP in next few weeks and remain at new level for quite some time Which internal hedging technique will be appropriate in that situation Also, if your firm does not have resources would you benefit from having forward hedge Q4 Using money market hedge, how much worth of Canadian Dollars John enterprises will get today against its exports Remember, current date is different then the transaction date Q5 Using forward market hedge what would be the proceeds in C$ from exports

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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

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$50,000	7^th March 2019	6^th June 2019	India
Yarn	C$ 300,000	1^st March 2019	30^th March 2019	Pakistan
Grade A yarn	C$ 1,000,000	28^th Feb 2019	30^th April 2019	Indonesia
Grade B yarn	C$ 200,000	24^th Feb 2019	23 May 2019	India
Cotton	C$ 550,000	18^th Feb 2019	17^th May 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	For the purpose of *question#4 & 5* calculations consider following days between transaction and settlement
Denim Jeans	US 2,000,000	6^th March 2019	5^st May 2019	USA	57 days
Kids clothing	1,500,000	21^st Feb 2019	20^th May 2019	Spain	72 days
Garments	5,500,000	1^st Feb 2019	30 April 2019	Germany	52 days
Garments	1,000,000	1^st Jan 2019	14 March 2019	UAE	6 days

Spot rates:

C$ 0.76/US$

C$ 1.7/

C$ 1.5/

Interest rates of different countries are given below:

US$ interest rate=iU$= 3%

Canadian $ interest rate= iC$= 5% European $ interest rate= i= 2% UK $ interest rate= i= 1%

Indian Rupees (INR Interest rate) = iINR= 8% Pakistani Rupees (PKR Interest Rate) = iPKR= 10% Indonesian Rupiah (IRH Interest Rate) = iIRH= 6%

Questions:

Q1: Quantify the foreign exchange exposure of John Enterprises. Is Johns 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. Remember, current date is different then the transaction date.

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