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foreign exchange planning - overall long-term strategy

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1. How does making foreign exchange planning a part of overall long-term strategy enable companies to exploit opportunities?

2. Should an MNC always try to hedge its foreign exchange risk? Why or why not?

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https://brainmass.com/business/multinational-corporations/foreign-exchange-planning-overall-long-term-strategy-443169

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How foreign exchange planning as part of overall long-term strategy enables companies to exploit opportunities:

A company involved in international trade is exposed to foreign exchange risk due to fluctuating foreign exchange rates and this risk can affect a business in different ways. Fluctuations in foreign exchange rates affect the conversion currencies in the balance sheet and may result in changes in a company?s competitive position (O?Leary, 2010). The main strategy employed by companies to manage foreign currency risk is through hedging. There are different tools that can be used in hedging against foreign currency risk and this includes the use of spot contracts, currency swaps, call and put options, future contracts, and stops loss orders.

Foreign exchange planning can be effective strategy in avoiding risks associated with currency transactions. One of the benefits offered by foreign exchange planning is ability to budget resources and this can be helpful in evaluating whether the business will be able to exploit opportunities. A business can enter into forward contracts with partners and therefore specifying exchange rate and the business is able to determine the costs that it will incur and subsequently facilitating budgeting and effective allocation of resources. Foreign exchange planning also outlines any financial impediments that a business could encounter in conducting operations in a certain country.

Another way in which foreign currency planning is beneficial to an organization is that it reduces the effect that foreign exchange rate has on profit ...

Solution Summary

The solution explains how making foreign exchange planning a part of overall long-term strategy enables companies to exploit opportunities. An explanation of if MNC should always try to hedge its foreign exchange risk is given.

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Vogl Company 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'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 dollarâ??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 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 dollarâ??s 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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