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$50,000	7th March 2019	6th June 2019	India
Yarn	C$ 300,000	1st March 2019	30th March 2019	Pakistan
Grade A yarn	C$ 1,000,000	28th Feb 2019	30th April 2019	Indonesia
Grade B yarn	C$ 200,000	24th Feb 2019	23 May 2019	India
Cotton	C$ 550,000	18th Feb 2019	17th 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	6th March 2019	5st May 2019	USA	57 days
Kids clothing	1,500,000	21st Feb 2019	20th May 2019	Spain	72 days
Garments	5,500,000	1st Feb 2019	30 April 2019	Germany	52 days
Garments	1,000,000	1st 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.