Case Report: Acpana Business Systems Inc.

Case report: Acpana Business Systems Inc.

Subject to: Prof. Yunbi An

Subject by: Jinyuan He

Student ID: 104122707

Frame the issue:

Acpana Business Systems Inc., a Canadian software development and backup-as-a service provider, was founded in 2003 by Jamie Brenzel, Rob Schenkel and Tim Jewell. Acpana’s success was based on utilizing its core platform, KineticD to deliver a superior solution that is accessible, secure, affordable and simple. However, Brenzel, the company’s CEO, concerned that the recent volatility and appreciation of the Canadian dollar would affect the company’s revenue and growth. As a result, he tasked Schenkel, the company’s VP of operations, to research different hedging opportunities and give recommendations whether the unsure effect of the fluctuating Canadian dollars on company’s revenues can be minified.

1. 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$.

We can know from Exhibit 6 that the current spot rate on March 1, 2011 is S0=Cdn$0.9702.

Position A: 1 Cdn$=1 US$

Assume 1 month forward contract based on Exhibit 7 and the future spot rate is et=1 Cdn$/US$. We can get the following chart:

　 | March 1, 2011 | April 1, 2011 |

Spot rate | Cdn$0.9702 | Cdn$1 |

1-Month Forward Delivery Price | 　 | Cdn$0.97374 |

April call option price (et >k=Cdn$0.97374) | 0.9731% | 0.9334% |

If Acpana does not hedge against the risk, then the gain = (1-0.9702) ×200,000 = Cdn$5,960.

If hedging with:

Selling forward: (1-0.97374) ×200,000 = Cdn$5252 loss

Buying call option: (0.9731%-0.9334%) × 200,000 = Cdn$79.4 loss

The forward contract hedge offers the closest offset to the gain due to the relative decline of CAD dollars.

Position B: 1 Cdn$=0.90 US$

Assume 1 month forward...