Int. Economics Assgn

8/7/2019 Int. Economics Assgn

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International Economics and Finance Exchange Rate Risk Management

Universitas Islam Indonesia Case of Vogl Co. U.S.

Currency Total Inflow Total Outflow Net Cash flow

Canadian Dollar (C$) C$ 32,000,000 C$ 2,000,000 C$ 30,000,000

New Zealand Dollar (NZ$) NZ$ 5,000,000 NZ$ 1,000,000 NZ$ 4,000,000

Mexican Peso (MXP) MXP 11,000,000 MXP 10,000,000 MXP 1,000,000

Singapore dollar (S$) S$ 4,000,000 S$ 8,000,000 (-) S$ 4,000,000*

*= Loss

1. Net Cash Flow Exposure using Spot rate

Currency Spot rate Net Flow in U.S dollar ($)

Canadian Dollar (C$) $ .90 30,000,000 * .90 = 27,000,000

New Zealand Dollar (NZ$) .60 4,000,000 * .60 = 2,400,000

Mexican Peso (MXP) .18 1,000,000 * .18 = 180.000

Singapore dollar (S$) .65 (-) 4,000,000 * .65 = (-) 2,600,000

Total Net Flow in U.S. Dollar $ 26,080,000

2. Anticipating unpredictable future exchange rate

Currency Spot rate as a

Future Spot Rate

One year

Forward Rate

Rate against U.S $

comparing Forward

rate with spot rate

Rate

Canadian Dollar (C$) $ .90 $ .93 Appreciate .03

New Zealand Dollar (NZ$) .60 .59 Depreciate .01

Mexican Peso (MXP) .18 .15 Depreciate .03

Singapore dollar (S$) .65 .64 Depreciate .01

Total net flow using future spot rate: $ 26,080,000

Net Flow using Forward rate (per currency)

Currency One year

Forward Rate

Net Flow in U.S dollar ($)

Canadian Dollar (C$) $ .93 30,000,000 * .93 = 27,900,000

New Zealand Dollar (NZ$) .59 4,000,000 * .59 = 2,360,000

Mexican Peso (MXP) .15 1,000,000 * .15 = 150.000

Singapore dollar (S$) .64 (-) 4,000,000 * .64 = (-) 2,560,000

Total Net Flow in U.S. Dollar $ 27.850.000

Base on calculation above, the company gain positive on net flow around $ 1,770,000 by hedging

through forward contract per currency. Although the majors currencies are depreciating against dollar,

the appreciation of Canadian Dollar (C$) make the balance are increase. It also the Canada Subsidiaries

has the biggest contribution for the Main Company. The depreciation on Singapore dollar also gives

good impact to the company balance. The loss in Singapore subsidiaries also has been cut-off around


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$40,000. For the conclusion, if the net flow from subsidiaries is positive, it would be better if the

subsidiary rate is appreciated against U.S and for the net flow subsidiary which in Loss, its better if the

exchange rate is deprecated.

If in the future there are offsetting exchange rate, there would be affect to the company because the

forecasting is failed. It true from the calculation, we can see the critical affect happening in Canadian

Dollar (C$) and the Singapore Dollar (S$). Both of them are the main currencies that have biggest

contribution in the company balance. Canadian Dollar contributes C$30,000,000 in income and has the

highest rate among the other currency involve (exclude U.S. dollar). The Singapore dollar also being

crucial, because the transaction in Singapore Dollar are negative and the amount is the second highest

and have the second highest in exchange rate.

If the future rates are determine by that, we are trying to give another suggestion besides usingforward

contract per currency. We try to make a forward contract in the Canadian Dollars to minimize the

exchange rate risk. so in our suggestion, vogls must turn in their net flow currency in Canadian dollar

(exclude Singapore Dollar, because the transaction there are negative) and put it on forward market toget rate $0.93 Because the exchange rate is appreciate so in the future we can get much U.S dollar.

Calculation:

Total net cash flow1: $ 26,080,000 (-) $ 2,600,000 = $ 28,680,000

Turn into Canadian Dollar (using spot rate, spot rate = 0.90); $28,680,000 * 1/ .90 = C$ 31,888,889

Total gain in U.S dollar if using forward market based on Canadian Dollar (forward rate= .93):

C$31,866,667 (.93) = $ 29,636,000

There still uncalculated in Singapore transaction,

Option 1. Spot rate for Singapore dollar to U.S. Dollar is 0.65.

Exchange several amount cash inflow to cover the loss in Singapore using spot rate $29,636,000 -$2,600,000 = $27,036,000

So the total net flow for the Vogls in using that method is $ 27,036,000

Option 2. Get Singapore dollar by forward contract.

Vogls need S$ 4,000,000; we can get it made forward contract $2,560,000 (forward rate $0.64) and get

S$ 4,000,000 in the future. so the vogls gain $ 29,636,000 $ 2,560,000 = $ 27,076,000

3. Net Cash flow in Canadian Dollar (C$) analysis

Net Cash Flow in Canadian Dollar (using spot rate) =

Net Cash Flow in U.S $ * (1/0.9) = C$ 28, 977, 777, 77

Net Cash Flow in Canadian Dollar (using Forward rate) = Net Cash Flow in U.S $ * (1/0.93) =

Net Cash Flow in U.S $ * (1/0.9) = C$ 29,946,236.56

1without the transaction in Singapore subsidiary


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Net Cash Flow Spot Rate Forward Rate

Net Cash Flow in U.S Dollar $ 26,080,000 $ 27.850.000

Net Cash Flow in Canadian Dollar C$ 28, 977, 777, 77 C$ 29,946,236.56

Hedging Canadian Dollar (exclude premium cost)

It would be true in expecting better rate of Canadian Dollar (the Canadian dollar appreciates against the

U.S dollar) for gaining additional U.S Dollar.

That Vogl Co. anticipates receiving C$ 28,977,777,- in a year. During this period, Vogl Co. is in a

uncovered position. If the dollar price of the Canadian dollar (the dollar appreciates against the

Canadian dollar), Vogls receipts will be worth less than C$ 28,977,777 ,- are converted to dollars.

To avoid this foreign exchange risk, Vogl can contract to sell its expected Canadian receipts in theforward market at todays forward rate. By locking into a set forward-exchange rate, Vogl is guaranteed

that value of its Canadian Dollar receipts will be maintained in term of the dollar, even if the value of

Canadian Dollar should not happen to fall. With the current forward rate, Vogl can gain C$ 29,946,236.-.

So it prefers to hedge in Canadian dollar and sell it in forward market.

4. Forecasted Cash Flow related to Hedging Activities

Assumption:

- The range of Net Cash Flow in Canadian Dollar is C$ 20,000,000 C$ 40,000,000- Hedging C$ 30,000,000, using forward contract gain $ 27,900,000- one year - forward rate for Canadian dollar is $ 0.93

Based on those assumptions, we know that the lowest point is around C$ 20,000,000 and the highest

point is C$ 40,000,000. In assumption for hedging C$ 30,000,000, there C$ 10,000,000 differences in

both of case if the net cash flow either in lowest and highest level.

The risks come from the unpredictable net inflow and the exchange rate. Below the calculation about it

for every condition in term lowest and highest point;

Condition 1. If the net inflow is same with the amount that being hedge. (C$ 30,000,000) the company

would not face any risk from that decision.

Condition 2. If the net inflow is less than the hedging amount (C$ 20,000,000), automatically the

company faces the risk from it. Vogls must get C$ 10,000,000 to cover their contract.


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- Option 1.At the end of contract, vogls can cover it by making short loan from the bank or other financial

institution at certain rate to get C$ 10,000,000. In this strategy, Vogls must find the financial

institutions that offer the loan with the lowest rate or lower than the forward rate ( .93)

case:

1. If the future spot rate of Canadian is higher than Forward rate

2. If the future spot rate Canadian Dollar is lower than forward rate

- Option 2.No ideas. using call option?

Condition 3. If the amount of net inflow over the hedging (C$ 40,000,000), the company faces risk if the

future spot rate of Canadian dollars is depreciating against dollars instead the company can gain more if

the future spot rate of Canadian dollar is appreciating against U.S dollar.

If the vogls made a forward contract in amount of C$ 40,000,000; they would get $ 37,200,000.

If in the future, the spot rate is lower than the forward rate, the Vogls missing to maximize their profit

in term Exchange rate. For example the future spot rate is 0.90. The amount is not invested is C$

10.000.000. Vogls only gain $ 9,000,000 + $ 27,900,000 = $ 36,900,000.

But, if in the future the spot rate is higher than a forward rate, Vogls would gain more than the amount

expected if they invest their all money in forward market.

5. Long Term Investment in term of eliminating the exposure to Exchange Rate

Illustration:

Investment

= products flow

= Fund Flow

Main Office

(In U.S.)

Canada

Canada Subsidiary


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Investment Activity overview

Based on investment activity that made by the Vogls, want to try to eliminate the in exchange rate

fluctuation. I think, it not fully eliminated the exchange rate exposure risk. Because the main corporate

still in U.S and use U.S. Dollar as their currency in their balance reports.

note: maaf klo ada salah hitung atau penjabaran. please edit or delete or adding as your wish.

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Int. Economics Assgn

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