Pixonix Inc

1132 WordsMay 15, 20115 Pages
PIXONIX INC. - Currency Exposure Answers Question #1 The company Pixonix Inc is based in Canada and its revenues are based in CAD, however Pixonix dealt with US firms, so a majority of Pixonix's expenses were paid in US Dollars. Of key interest is the annual payment of US$7.5million at the end of January each year as well as the payments made at the end of June each year (which required the CAD to be converted to USD). Recently the CAD has been appreciating and positively affecting Pixonix's profitability, however since some of the cash flows needed to be converted to USD Pixonix is exposed to currency exchange risk. Cain's dilemma is to choose between either to purchase a forward contract and lock the cost of the January…show more content…
Also based on our estimates, by not hedging Pixonix would save the greatest amount of money should the CAD appreciates. Question #5 An alternative would be to hedge by purchasing call options, of course here we assume the CAD might depreciate. These options allow for the company to limit its risk; as with some options where you are not obligated to exercise them Pixonix will only lose on the option premium. Pixonix should purchase call options at the strike price of 93.5 Appendix #1 - Forwards Spot Rates | No-Hedge | Forwards | Costs of Future | 1 USD = 1 CAD | 7,500,000 | 7,012,425 | 487,575 | 1 USD = 0.90 CAD | 6,750,000 | 7,012,425 | (262,425) | 1 USD = 1.10 CAD | 8,250,000 | 7,012,425 | 1,237,575 | *Figures in CAD *Column 3: Since we are in November, Cain can engage in a 3-month Forward to coincide with the payments at the end of January - (Ask Price of 0.934490) - From Exhibit 1 *Column 4: Shows the costs of the future in comparison to the No-hedge Appendix #2 - Call Option @ Strike Price of 93.5 Spot Rates | No-Hedge | Options | Costs of Option | 1 USD = 1 CAD | 7,500,000 | 7,013,250 | 486,750 | 1 USD = 0.90 CAD | 6,750,000 | 6,311,925 | (263,250) | 1 USD = 1.10 CAD | 8,250,000 | 7,013,250 | 1,236,750 | *Figures in CAD *Number Of Options = 7.5m / 100USD = 75,000 *Call Option rate = 7,500,000 * 0.9351 (strike price) = 7,013,250 *Option Premium = Ask Price * Face Value (0.79) * 100 =

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