1. Question: Sources of Supplies and Exposure to Exchange Rate Risk Laguna Co.(a U.S. firm) will be receiving 4 million British pounds in one year. It will need to make a payment of 3 million Polish zloty in one year. It has no other exchange rate risk at this time. However, it needs to buy supplie...
14. Sources of Supplies and Exposure to Exchange Rate Risk Laguna Co.
(a U.S. firm) will be receiving 4 million British pounds in one year. It will
need to make a payment of 3 million Polish zloty in one year. It has no
other exchange rate risk at this time. However, it needs to buy supplies
and can purchase them from Switzerland, Hong Kong, Canada, or
Ecuador. Another alternative is that it could also purchase one-fourth of
the supplies from each of the four countries mentioned in the previous
sentence.
The supplies will be invoiced in the currency of the country from which
they are imported. Laguna Co. believes that none of the sources of the
imports would provide a clear cost advantage. As of today, the dollar
cost of these supplies would be about $6 million regardless of the source
that will provide the supplies.
The spot rates today are as follows:
1. British pound = $1.80
2. Swiss franc = $.60
3. Polish zloty = $.30
4. Hong Kong dollar = $.14
5. Canadian dollar = $.60
The movements of the pound and the Swiss franc and the Polish zloty
against the dollar are highly correlated. The Hong Kong dollar is tied to
the U.S. dollar, and you expect that it will continue to be tied to the
dollar. The movements in the value of the Canadian dollar against the
U.S. dollar are not correlated with the movements of the other
currencies. Ecuador uses the U.S. dollar as its local currency.
Which alternative should Laguna Co. select in order to minimize its
overall exchange rate risk? Transaction exposure is different from
economic exposure, whereas transaction exposure only encompasses
international transactions and economic exposure includes all changes
to cash flow. Transaction exposure is a subset of economic exposure
(Madura, J., 2020).
14. Financing to Reduce Exchange Rate Exposure Nashville Co. presently
incurs costs of about 12 million Australian dollars (A$) per year for
research and development expenses in Australia. It sells the products
that are designed each year, and all of the products sold each year are
invoiced in U.S. dollars. Nashville anticipates revenue of about $20
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