Question Details

Would you hedge the Canadian dollar position 



Exchange Rate Risk Management
Vogl Company is a U.S. firm conducting a financial plan for the next year. It has no foreign
subsidiaries, but more than half of its sales are 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 dollars (C$) C$32,000,000 C$2,000,000
New Zealand dollars (NZ$) NZ$5,000,000 NZ$1,000,000
Mexican pesos (MXP) MXP11,000,000 MXP10,000,000
Singapore dollars (S$) S$4,000,000 S$8,000,000
The spot rates and one-year forward rates as of today are:
Currency Spot Rate One-Year Forward Rate
C$ $ .90 $ .93
NZ$ .60 .59
MXP .18 .15
S$ .65 .64

1. Based on the information provided, determine the net exposure of each foreign currency in dollars.
2. Assume that today- spot rate is used as a forecast of the future spot rate one year from now. The
New Zealand dollar, Mexican peso, and Singapore dollar are expected to move in tandem against
the U.S. dollar over the next year. The Canadian dollar- movements are expected to be unrelated
to movements of the other currencies. Since exchange rates are difficult to predict, the forecasted
net dollar cash flows per currency may be inaccurate. Do you anticipate any offsetting exchange
rate effects from whatever exchange rate movements do occur? Explain.
3. 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?
4. Assume that the Canadian dollar net inflows may range from C$20,000,000 to C$40,000,000 over
the next year. Explain the risk of hedging C$30,000,000 in net inflows. How can Vogl Company
avoid such a risk? Is there any tradeoff resulting from your strategy to avoid that risk?
5. Vogl Company recognizes that its year-to-year hedging strategy hedges the risk only over a given
year, and does not insulate it from long-term trends in the Canadian dollar- value. It has
considered establishing a subsidiary in Canada. The goods would be sent from the U.S. to the
Canadian subsidiary and distributed by the subsidiary. The proceeds received would be reinvested
by the Canadian subsidiary in Canada. In this way, Vogl Company would not have to convert
Canadian dollars to U.S. dollars each year. Has Vogl eliminated its exposure to exchange rate risk
by using this strategy? Explain.



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