Case Study

Table of Contents

Executive Summary 3

Net Exposure 4

Offsetting Exchange Rate Effects 4

The Canadian Dollar 5

Risk of Hedging Net Inflows 5

A Subsidiary as a Solution? 5

Summary of Recommendations 6

References 7

Appendix 8

Executive Summary

The U.S. firm, Vogl Company, has global import and export operations that can significantly impact its financial position. The firm both imports and exports to Canada, New Zealand, Mexico, and Singapore, although it does not have any foreign subsidiaries. Canada is by far Vogl’s largest market, accounting for 79% of its $36.4 million in 2010 exports. New Zealand and Singapore are closely tied as purveyors of Vogl products, with the former accepting 8.2% and the latter accepting 7.1%. Mexico has the smallest Vogl export market of 5.4%. Vogl also imported nearly $10 million USD of materials, with 55% coming from Singapore, 19% coming for both Canada and Mexico, and 6% coming from New Zealand. Vogl’s main currency is the U.S. dollar. However it conducts transactions in Canadian dollars (CAD), New Zealand dollars (NZD), Mexican pesos (MXP), and Singapore dollars (SGD). The firm is evaluating monetary policies to better manage exchange rate risks and capitalize on increased revenues from higher-rate exports and lower-rate imports through currency capitalization strategies. One option under consideration is to launch a foreign subsidiary.

Team Case Study: Exchange Risk Management Integrative Problem

Net Exposure

Vogl’s net exposure is as follows:

Exports (Inflows) | | Imports (Outflows) |

Local Currency Transactions | Spot Rate | Exports in USD | % of vol | | Local Currency Transactions | Spot Rate | Imports in USD | % of vol |

CAD 32,000,000.00 | 0.9 | $28,800,000 | 79.2% | | CAD 2,000,000 | 0.9 | $1,800,000 | 19.1% |

NZD 5,000,000.00 | 0.6 | $3,000,000 | 8.2% | | NZD 1,000,000 | 0.6 | $600,000 | 6.4% |

MXN 11,000,000 | 0.18 | $1,980,000 | 5.4% | | MXN 10,000,000 | 0.18 | $1,800,000 | 19.1%...