Question

Jones Company is a U.S. firm preparing its financial plan for the upcoming year. It has no foreign subsidiaries, but the majority of its sales are from exports to Australia, Canada, Argentina and Taiwan. Estimated foreign cash inflows to be received from exports and foreign cash outflows to be paid for imports over the next year are shown below: Currency Total Inflow Total Outflow Australia dollars (A$) A$33,000,000 A$3,000,000 Canada dollars (C$) C$6,000,000 C$2,000,000 Argentina pesos (AP) AP12,000,000 AP11,000,000 Taiwan dollars (T$) T$5,000,000 T$9,000,000 Today’s spot rates and one-year forward rates in US$ are as follows: Currency Spot Rate One-Year Forward Rate A$ $ .91 $ .94 C$ .61 .60 AP .19 .16 T$ .66 .65 2. The current spot rate is used by Jones as a forecast of the future spot rate one year from now. The C$, AP, and T$ are expected to move in tandem with the U.S. dollar during the upcoming year. The A$’s movements are expected to be independent of the movements of the other currencies. As exchange rate movements are difficult to predict, the estimated net dollar cash flows per currency may differ from the estimates. Could the exchange rate movements from whatever exchange rate movements do occur offset each other? Explain. Be specific.

Answer 1

As the spot rate table in the question gives the USD per unit of the foreign currency, Let us start finding the USD Figure by simply multiplying the spot rate and the foreign currency inflows and outflows:

	Total inflows	Total outflows	Spot rate	Inflows in $	Outflows in $	Net exposure(difference)
Australia dollars	33,000,000	3,000,000	0.91	30,030,000	2,730,000	27,300,000
Canada dollars	6,000,000	2,000,000	0.61	3,660,000	1,220,000	2,440,000
Argentina pesos	12,000,000	11,000,000	0.19	2,280,000	2,090,000	190,000
Taiwan dollars	5,000,000	9,000,000	0.66	3,300,000	5,940,000	(2,640,000)

The C$, AP, and T$ are expected to move in tandem. The dollar value of exposure on net inflows is about equal to the dollar value of exposure on net outflows for these currencies.
Thus, the exchange rate effects of the 2 inflow currencies (C$ and AP) should be offset by the effects of the one outflow currency (T$)