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Case Study - PIXONIX INC. - ADDRESSING CURRENCY EXPOSURE
Introduction - The paper evaluates the case of the PIXONIX INC which being agraphic company the problems revolves to ensure the following point of view the payment was due at the end of each year Cain faced a considerable amount of uncertainty about the value of the Canadian dollar at the end of January, when she would have to purchase US$7.5 million which provides the concept of cash flow analysis, profitability parameters and also the positive impacts which can lead to help in solving various questions and answers in connection with the following:
1. Why is Cain concerned by the exchange rate fluctuation? Is her position long or short?
Cain is concerned through the aspect of the exchange rate fluctuation the same is very essential as an annual fee of US 7.5 million is converted any changes in the rates of the two countries will lead to a difficult situation as the company can led to either inflated profits as well as inflated Losses. In both case the rate can lead to in appropriate results and judgements. On the other hand, her position is considered to be long as it is prominent and a regular feature and always done on a set time period and for a known transaction.
2. If Can decides to use options would she use a put or a call?
Cain deals in a long position and therefore, it is evident that the option which the Cain must opt for is the call option. As this option leads to a position where the contract provides the buyera right and the obligation to buy the assets at adesignated price. Further, call option ensures that the price of the assets will increase and provide better value than the current position. Therefore, call is a better option as on date (Chakravorty, & Awasthi, 2018).
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3. Calculate the impact of the two hedging strategies and the unhedge positionunder the following three scenarios at the end of January:
4. US$ = C$
5. US$ = C$0.90
6. US$ = CS1.10 (to simplify, ignore difference in time value over the 3-month period.)
7. Should Cain hedge her position in US$? Why or why not?
3) In case of the hedging and the non-hedgingstrategies will definitely show different results and analysis as the output in terms of exchange rate will be different and un planned. Further, hedging helps in saving the losses where as un hedge value if not planned will lead to a difficult position.
4) & 5) &6) & 7) US $ 3 Month Forward rate = 2.5%, C$ 3 Month Forward rates = 1.75 % (Global Rates, 2018)
The hedging and the non-hedging will lead to following position: In case for all the valueany condition of exchange and non-exchange will also differ because th interest parity rates, all the conditions will be defined as follows: -
|
Condition
|
US$
|
C$
|
Interest rate US$
|
Interest rate C $
|
Rate Computation
|
US$
|
C$
|
Invested Value
|
US$
|
C$
|
|
1)
|
$ 1.00
|
$ 1.00
|
2.5
|
1.75
|
1.025
|
1.0175
|
$ 0.98
|
$ 0.98
|
$ 75,00,000
|
$ 75,00,000.00
|
$ 75,55,282.56
|
|
2)
|
$ 1.00
|
$ 0.90
|
2.5
|
1.75
|
1.025
|
1.0175
|
$ 0.98
|
$ 0.88
|
$ 75,00,000.00
|
$ 67,99,754.30
|
|
3)
|
$ 1.00
|
$ 1.10
|
2.5
|
1.75
|
1.025
|
1.0175
|
$ 0.98
|
$ 1.08
|
$ 75,00,000.00
|
$ 83,10,810.81
|
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In case we do hedge or do not hedge when the exchange value is same the Cain will not suffer any losses or profit.
In case for second condition and the third condition it is advisable to hedge as in case the value is not hedge then the it will lead to a condition which may show inflated losses and inflated profits in case of the above two equations the difference will be equal to the following conditions :-
|
Condition
|
US$
|
C$
|
US$
|
C$
|
Difference
|
Impact
|
|
1)
|
$ 1.00
|
$ 1.00
|
$ 75,00,000.00
|
$ 75,00,000.00
|
$ -
|
No impact
|
|
2)
|
$ 1.00
|
$ 0.90
|
$ 75,00,000.00
|
$ 67,99,754.30
|
$ -7,00,245.70
|
If not Hedged the cash outflow will be showed as a lesser value and so will the money value of the cash flow will be - leading to loss
|
|
3)
|
$ 1.00
|
$ 1.10
|
$ 75,00,000.00
|
$ 83,10,810.81
|
$ 8,10,810.81
|
If not Hedged the cash outflow will be showed as a higher value and so will the money value of the cash flow will be - leading to inflated higher value
|
8. Which hedge should she use?
The appropriate hedge is the parity where the US $ = C$ as there is no situation inflated profits or losses and ideal to record the business transactions as any up word and the downward movement would lead to a dis satisfying situation.
9. If you chose the option, specify the option price.
In case the chose to option the Cain must use call option at three months forward as per the current interest rate parity concepts.
Conclusion
Thus, this paper ensures that how an crucial is the hedging concept and how effectively can the same can be useful in minimizing the losses and the situation of the inflated profits. So that the expenses is maintained and a balance situation is achieved.
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