Information about the Case Report Case Acpana Business Syste

Information about the Case Report

Case: Acpana Business Systems Inc.: Effect of Currency Exposure on Revenue

Due date: This report is due at the beginning of the class on July 19, 2018.

Your case report MUST be typed, and must be handed in as a paper copy in class. Hand-written reports are not accepted.

Feel free to make assumptions; justify your assumptions.

You report should include the following analysis:

Frame the issue. Why is Brenzel Concerned by the current exchange rate fluctuation?

Which vehicles does Acpana have at its disposal for hedging? Assume Acpana will need to transfer $200,000 US dollars to Canadian dollars on a regular basis, calculate the impact of these different hedging strategies against a naked position at:

1 Cdn$=1 US$;

1 Cdn$=0.90 US$;

1 Cdn$=1.10 US$.

Should Schenkel recommend Acpana hedge its position in Canadian dollars? Why or why not? If you think he should recommend a hedge, which vehicle should he recommend?

Does the Economist Business Unit’s forecast that the Canadian dollar will finish the year at parity to the US dollar affect your decision to hedge?

Summarize your conclusions

Solution

1) OPTION A: 1 Cdn$=1 US$

Assumption: 1 month forward,

Future Spot rate (et) = 1Cdn$/US$

Current Spot rate = Cdn$0.9702/US$

Delivery price (K) = Cdn$0.97374/US$

Therefore, et > K i.e. Cdn$1 > 0.97374

If Acapana decides not to hedge against Canadian dollar, it will buy Cdn$ at Cdn$0.9702 = 0.9702 X $200,000 = Cdn$ 194,040 and not at K= 0.97374

Hence, it will make a gain due to change in currency rates: 200,000 – 194,040 = Cdn$ 5,960

If Acapana decides to hedge, it will sell forward at Cdn$0.97374 = 0.97374 X 200,000 = Cdn$194,748 and make a loss of 200,000 – 194,748 = Cdn$ 5,252

Buy Call Option:

LOSS: (0.9334 X 200,000) – (0.9731 X 200,000) = 186,680 – 194,620 = Cdn$7,940

The forward hedge offers the closest offset due to the increase of the Canadian dollar.

OPTION B: 1 Cdn$=0.90 US$

Assumption: 1 month forward,

Future Spot rate (et) = 1.1111Cdn$/US$

Current Spot rate = Cdn$0.9702/US$

Delivery Price (K) = Cdn$0.97374/US$

Therefore, et > K i.e. Cdn$1.1111 > 0.97374

If Acapana does not hedge against Canadian dollar appreciation, it will buy Cdn$ at Cdn$1.1111 = 1.1111 X $200,000 = Cdn$222,220.

Therefore it will make a GAIN: 222,220 – 194,040 = Cdn$ 28,180

If Acapana hedges, it will sell forward at Cdn$0.97374 = 0.97374 X 200,000 = Cdn$194,748 and make a LOSS of 222,220 – 194,748 = Cdn$ 27,472

Buy Call Option:

LOSS: (0.9334 X 200,000) – (0.9731 X 200,000) = 186,680 – 194,620 = Cdn$7,940

The forward hedge offers the closest offset due to the increase of the Canadian dollar.

OPTION C: 1 Cdn$=1.10 US$

Assumption: 1 month forward,

Future Spot rate (et) = 0.9091Cdn$/US$

Current Spot rate = Cdn$0.9702/US$

Delivery Price (K) = Cdn$0.97374/US$

Therefore, et > K i.e. Cdn$0.9091 < 0.97374

If Acapana does not hedge against Canadian dollar appreciation, it will buy Cdn$ at Cdn$0.9091 = 0.9091 X $200,000 = Cdn$181,820, therefore it will make a LOSS: 181,820 – 194,040 = Cdn$ 12,219

If Acapana hedges, it will buy forward at Cdn$0.97374 = 0.97374 X 200,000 = Cdn$194,748 and make a GAIN of 194,748 – 181,820 = Cdn$ 12,928

Sell Put Option:

LOSS: (0.9334 X 200,000) – (0.9731 X 200,000) = 186,680 – 194,620 = Cdn$7,940

The forward hedge offers the closest offset due to the decrease of the Canadian dollar.

2.

Yes, Schenkel should recommend Acpana to hedge its position in Canadian Dollars because Canadian Dollar is unstable and the variations can have either a positive or negative effect on Acpana’s profits, therefore profit projections are uncertain.

I recommend that Acpana should hedge with either the forward contracts, call or put options.

For Option A, the forward hedge offers the closest offset due to the increase of the Canadian dollar.

For Option B, also the forward hedge offers the closest offset due to the increase of the Canadian dollar.

For Option C, the forward hedge offers the closest offset due to the decrease of the Canadian dollar.