Case solution:
PIXONIX INC. - ADDRESSING CURRENCY EXPOSURE
Karim A. Moolani wrote this case under the supervision of Professor Colette Southam solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.
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Copyright 2008, Ivey Management Services Version: (A) 2008-06-05
On Friday November 2, 2007, Mikayla Cain, chief financial officer of Pixonix Inc., sat in her office and pondered the impact of the strong Canadian dollar on her firm's projected financial results. The Report on Business today stated that the Canadian dollar had hit another record, jumping to US$1.0717 from the previous day's close of $1.0512 after a stronger-than-expected jobs report reduced the odds of an interest-rate cut. The Canadian dollar had already been the world's best-performing major currency this year,increasing 25 per cent against the U.S. dollar and almost seven per cent in the past month alone. Cain knew she would have to understand the impact of the strong dollar on her firm's cash flows and the tools available to manage the company's currency risk.
THE COMPANY
Pixonix was a graphic design company that operated in Toronto, Canada. At an annual cost of US$7.5 million, the company licensed proprietary tools and software through a U.S. company; this payment was due at the end of January each year. While all of the company's revenues were denominated in Canadian dollars, a significant portion of its expenses were paid in U.S. dollars. Therefore, Pixonix had to annually convert its Canadian dollar cash flows into U.S. dollars. As the Canadian dollar strengthened, cash flow and profitability had been positively impacted, but Cain faced a considerable amount of uncertainty about the value of the Canadian dollar at the end of January, when she would have to purchase US$7.5 million............................................................
These are the case question, must be answered
1. Why is Cain concerned by the exchange rate fluctuation? Is her position long or short?
2. If Can decides to use options would she use a put or a call?
3. Calculate the impact of the two hedging strategies and the unhedge positionunder the following three scenarios at the end of January:
4. US$ = C$
5. US$ = C$0.90
6. US$ = CS1.10 (to simplify, ignore difference in time value over the 3-month period.)
7. Should Cain hedge her position in US$? Why or why not?
8. Which hedge should she use?
9. If you chose the option, specify the option price.
The paper should consist a brief description of the case, an explanation of the problem, alternative solutions, your recommendations, including materials, such as spreadsheets, needed to justify your recommendation.