1. Case: Acpana Business Systems Inc.: Effect of Currency Exposure on Revenue
4. Feel free to make assumptions; justify your assumptions.
5. 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 $200,000 US dollars to Canadian dollars on a regular basis, calculate the impact of these different hedging strategies against a naked position at:
a. 1 Cdn$=1 US$;
b. 1 Cdn$=0.90 US$;
c. 1 Cdn$=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.
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As companies are globalizing, they are accessing different economies so that their dependence on a single economy is reduced. However, this also enhances their currency exposure since they would be dealing with currencies of different economies. This report is based on one such global company - Acpana Business Systems Inc which is a Canadian software company in Toronto, Canada. Its revenue stream is consolidated between US and Canada with 51% of the revenues coming from United States and 38% from Canada. As such, it has substantial exchange rate exposure in both these currencies – US dollar and Canadian dollar. Arbitrage opportunities also exist for consumers due to currency rate fluctuations as was seen in the case of Canadian consumers who preferred to make payments with the US services site. This leads to cannibalization of sales across geographical business units. Foreign exchange exposure can also decrease the profits of the company since the gains in the foreign subsidiary can be offset with the exchange losses when the profits are translated in the home currency. As such, management needs to take substantial strategies so that the exchange rate exposure is reduced and the uncertainty pertaining to exchange rate movements can be reduced. This report presents an analysis of the hedging strategies available for Acpana so that its exchange rate risk is optimized and its growth can be sustained over the long term.
There are a wide range of hedging strategies available for Acpana. One such strategy is netting in which it can match the timing of payments and receipts in one currency so that the overall exchange rate exposure is reduced. As an example, if it is supposed to receive payment in US dollars from consumers over the next month, it can aim to match this receipt with payments for expenses in US dollars so that the overall exposure...
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