International Financial Management : Maple Leaf Inc.

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INTERNATIONAL FINANCIAL MANAGEMENT

MAPLE LEAF INC. INSTRUCTOR: PROFESSOR RAYMOND COX GROUP HEDGER INC SUNKANMI ODUFUWA

JERALD ZAKALL

Maple Leaf Inc.

Method 1 - Unhedged Cross Exchange Rate (Risky)
(GBP) 30,000,000 = (GBP)30,000,000 x 1.762(USD/GBP) = (USD)52,860,000 (T=0)
(GBP) 30,000,000 x 1.785(USD/GBP)=(USD)53,550,000 (T=3)
Difference of 53,550,000-52,860,000=(USD)690,000 (USD)690,000 x (CAD)1/0.91(USD) = (CAD)758,241.76

Short and Long Term Risks:
Increases in exchange rates would be detrimental the profits of Maple Leaf Inc. since there is a lot of uncertainty with respect to future exchange rates and which direction they will go
There is also risk of volatility with respect to exchange rates in the short and long term
This method also does not protect against any kinds of risks in the short or long term ei: exchange rate risk, opportunity cost of having the risk hedged and contingent exposure
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Method 2 - Forward Contract: 1.755(USD/GBP) 3 Month
(GBP) 30,000,000 = (GBP)30,000,000 x 1.762(USD/GBP) = (USD)52,860,000
(GBP) 30,000,000 x 1.755(USD/GBP)=(USD)52,650,000
Difference of 52,650,000-52,860,000= Loss of (USD)210,000 (USD)210,000 x (CAD)1/0.91(USD) = Loss of (CAD) 230,769.23

Short Term Risks:
Certainty of forward exchange rates eliminates exchange rate risk
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