Finance: United States Dollar and Cash Flow Essay

Submitted By hmz920
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Advance Technologies Case:

1. Explain why Harrison is concerned about currency exchange rate fluctuations.

Advance Technologies Inc. was a engineered plastic manufacturing company. The company’s revenue are most received in Canadian dollars due to they sell most products in Canadian market.

To get a manufacturing licensing of special product from Hart Industry- a U.S company, they had an agreement, which was AT have to pay upfront licensing fees of U.S 250,000 every month and all the necessary raw materials purchasing should be made from Hart Industry in U.S. dollars. This type of transaction equal to importing products from U.S.. However, the current situation was US dollar appreciates against the Canadian dollar. It means AT paid higher price for every expense in U.S. dollar. This unexpected volatile can significantly impact cash flow, earning and operation of the company.

2. Calculate Advance’s foreign exchange exposure and assess the impact on cash flow and income of a weakening Canadian dollar.

At September 30, 1993 USD1.00=CAD1.2195 All expense in U.S. dollars

Licensing fees=CAD3,658=U.S 2999.59 COGS=45,760=U.S. 37523.57 Interest=91=U.S 74.62
Before the exchange rate total USD Component was U.S 40,600.78 rather than CAD 49,509

According to each exchange rate, the net income and cash flow will fluctuate as the following:

| |1.2195 |1.2395 |1.2595 |1.2795 |1.2995 |
|Net Income |7495.804 |7008 |6521.458 |6034.284 |5547.11 |
|Deprciation |9640 |9640 |9640 |9640 |9640 |
|cash flow |17135.804 |16648 |16161.458 |15674.284 |15187.11 |

3. Do you believe, based on the limited information provided in the newspaper article and case, that the dollar will fall or rise?

I believe the currency exchange rate would fall down at first, then after referendum it may be upward again. This assumption based on following reason: Firstly, the political reason, Quebec incident would cause Canadian’s standard of living dropping and increased layoff rate. Secondly, global investor began to sell Canadian investments. Thirdly, the impact is from European currency exchange rate.

4. Evaluate the costs and benefits of the alternative hedging strategies presented in the case. These strategies would include the following: a. purchasing call options,

call premium=40600*2.034%*1.2536=1035.22

pay =(1.2536-1.2195)*40600= total MAX cost=

If the exchange rate beyond 1.2536, the benefit would occur, it equal to the Exchange rate *40600-51,931.38

b. purchasing a forward contract

purchase cost=40600*1.2719*(1+4%)=53,704.7

c. creating a “at the money collar” position-collar at the time buy call option sell the put option. Either way when we buy call option we pay the premium, at the same time we sell put option get the put premium from
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