Overhedging Denver Co. is about to order supplies from Canada that a re denominated in Canadian dollars (CS). It has no other transactions in Canada and will not have any other transactions in the future. The supplies will arrive in one year, at which time payment will be due. There is only one supplier in Canada. Denver submits an order for three loads of supplies, which will be priced at C\$3 million. The firm purchases CS3 million one year forward, because it anticipates that the Canadian dollar will appreciate substantially over the year. The existing spot rate is $0.62, and the one-year for ward rate is $0.64. The supplier is not sure if it will be able to provide the full order, so it guarantees Denver Co. only that it will ship one load of supplies. In this case, the supplies will be priced at C $ 1 million. Denver Co. will not know whether it will receive one load or three loads until the end of the year. Determine Denver’s total cash outflows in U.S. dollars under the scenario that the Canadian supplier provides only one load of supplies and that the spot rate of the Canadian dollar at the end of one year is S0.59. Show your work.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 11, Problem 41QA
Textbook Problem

Overhedging Denver Co. is about to order supplies from Canada that a re denominated in Canadian dollars (CS). It has no other transactions in Canada and will not have any other transactions in the future. The supplies will arrive in one year, at which time payment will be due. There is only one supplier in Canada. Denver submits an order for three loads of supplies, which will be priced at C\$3 million. The firm purchases CS3 million one year forward, because it anticipates that the Canadian dollar will appreciate substantially over the year.

The existing spot rate is $0.62, and the one-year for ward rate is $0.64. The supplier is not sure if it will be able to provide the full order, so it guarantees Denver Co. only that it will ship one load of supplies. In this case, the supplies will be priced at C $ 1 million. Denver Co. will not know whether it will receive one load or three loads until the end of the year.

Determine Denver’s total cash outflows in U.S. dollars under the scenario that the Canadian supplier provides only one load of supplies and that the spot rate of the Canadian dollar at the end of one year is S0.59. Show your work.

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