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Problem on Exchange Rate Risk Management

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Exchange Rate Risk Management. See attached for full problem description.

Vogl Co. is a U.S. firm conducting a financial plan for the next year. It has no foreign subsidaries 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 attached.

1. Based on the information provided, determine Vogl's net exposure to each foreign currency in dollars.
2. Assume that today's 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's 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 movements do occur?
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?

(see attached for full problem description)

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Canadian dollars
Net Flow = C$32,000,000 - C$2,000,000 = C$30,000,000
Where positive sign indicates inflow and negative sign indicates outflow
Net flow in dollar terms = 30,000,000*0.90=$27,000,0000

New Zealand dollars
Net Flow = NZ$5,000,000 - NZ$1,000,000 = NZ$4,000,000
Net flow in dollar terms = 4,000,000*0.60=$2,400,0000

Mexican pesos
Net Flow = MXP 11,000,000 - MXP 10,000,000 = MXP 1,000,000
Net flow in dollar terms = 1,000,000*0.18=$180,0000

Singapore dollars
Net Flow = S$ 4,000,000 -S$ 8,000,000 = S$ -4,000,000
Net flow in dollar terms = -4,000,000*0.65= - $2,600,0000
Negative sign indicates outflow


NZ$, MXP and S$ are expected to move in tandem against the US $. The total inflow in terms of dollar for these currencies is $2,580,000 while the total ...

Solution Summary

A case study for Vogl Co. in managing exchange rate risk based on spot and forward rates.

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Include a one-page Executive Summary immediately following the title page that includes a statement of the major issue(s) and your specific recommendations. The content of an Executive Summary is similar to an abstract.
Properly cite reference sources (APA format): these may include course material, information from magazines, journals, and online sources. All reference sources must have a publication date no earlier than 2004.

Recommended Resources:

Yahoo: http://finance.yahoo.com;
Reuters (Yahoo will refer you here): http://www.reuters.com;
Edgar (SEC source of 10-K and other required financial reports; this is my saved "Favorite"): http://www.sec.gov/cgi-bin/srch-edgar; (EDGAR stands for Electronic Data Gathering and Retrieval)
Hoovers (general company information): http://www.hoovers.com;
Bloomberg (a good source of interest rate data): http://bloomberg.com/markets/rates/index.html;
Wall Street Journal free site: http://online.wsj.com/public/page/0,,2_0323,00.html;
Moody's (bond ratings): http://www.moodys.com;
Standard and Poors (bond ratings): http://www2.standardandpoors.com;
New York Stock Exchange: http://www.nyse.com/;
Bondpage (bond information): http://www.bondpage.com;
Federal Reserve (interest rates): http://www.federalreserve.gov/releases/h15/update/;
Vanguard bond site: http://flagship2.vanguard.com/VGApp/hnw/FundsBondsMarketSummaryTable; and
Bond Marketing Association (trade group) site: http://www.investingbonds.com

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