Estimated foreign cash inflows to be received from exports

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Reference no: EM132897684

Jones Company is a U.S. firm preparing its financial plan for the upcoming year. It has no foreign subsidiaries, but the majority of its sales are from exports to Australia, Canada, Argentina and Taiwan. Estimated foreign cash inflows to be received from exports and foreign cash outflows to be paid for imports over the next year are shown below:

Currency Total Inflow Total Outflow

Australia dollars (A$) A$33,000,000 A$3,000,000

Canada dollars (C$) C$6,000,000 C$2,000,000

Argentina pesos (AP) AP12,000,000 AP11,000,000

Taiwan dollars (T$) T$5,000,000 T$9,000,000

Today's spot rates and one-year forward rates in US$ are as follows:

Currency Spot Rate One-Year Forward Rate

A$ $ .91 $ .94

C$ .61 .60

AP .19 .16

T$ .66 .65

1. Based on the data shown, What net foreign exchange exposure does Jones face for each foreign currency, stated in dollars?

2. The current spot rate is used by Jones as a forecast of the future spot rate one year from now. The C$, AP, and T$ are expected to move in tandem with the U.S. dollar during the upcoming year. The As movements are expected to be independent of the movements of the other currencies. As exchange rate movements are difficult to predict, the estimated net dollar cash flows per currency may differ from the estimates. Could the exchange rate movements from whatever exchange rate movements do occur offset each other? Explain. Be specific.

3. Given the forecast of the A$ along with the forward rate of the A$, what is the expected increase or decrease in US$ cash flows which would result from hedging the net cash flows in A$? Would you recommend that Jones hedge the A$ position? Justify your recommendation. Be specific.

4. Assume that the A$ net inflows may range from A$20,000,000 to A$40,000,000 over the next year. Explain the risk of hedging A$30,000,000 in net inflows. What would you recommend that Jones do to avoid that risk? Are there any tradeoffs or disadvantages associated with your recommendation? Be specific.

5. Jones recognizes that its year-to-year hedging strategy hedges the risk only for a given year. It does not insulate Jones from long-term trends in the As value. Jones has considered establishing a subsidiary in Australia. The completed goods would be sent from the U.S. to the Australian subsidiary for distribution. The proceeds received would be reinvested by the subsidiary in Australia This would eliminate the need for Jones to convert A$ to US$ each year. Does this strategy eliminate its exposure to exchange rate risk? What other exchange related exposures might be created if this strategy is implemented? Explain. Be specific.

6. Discuss the alternatives that Jones has in hedging its net positions in each currency. Which one would you choose for each currency based on the information shown and additional research you conduct? Be specific.

Reference no: EM132897684

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