Problem on Exchange Rate Risk Management
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?
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