THE ISSUE: Acpana Business Systems Inc., a Canadian software development and backup-as-a service provider, was founded in 2003 by Jamie Brenzel (CEO), Rob Schenkel (VP) and Tim Jewell (Board member). Acpana's core business was a cloud-based solution that enabled small and medium sized businesses to securely and backup, restore, access, and share their digital assets. Acpana's success was based on utilizing its core platform, KineticD (a rebranded form of "Data Deposit Box" in 2010) to deliver a superior solution that is accessible, secure, affordable, and simple. After its launch it grew the customers to 40,000 globally. However, Brenzel, the company's CEO, is concerned that the recent volatility and appreciation of the Canadian dollar caused by strong commodity prices, falling U.S interest rates and volatility of oil prices would significantly affect the company's revenue and undermine the company's growth. Again, because the company has a large amount of U.S. dollar accounts receivable, but the company's basic currency is Canadian dollars. If in the future the Canadian dollar strengthens and the U.S. dollar falls, the company will bear the losses caused by this part of the exchange rate fluctuation. As a result, he tasked Schenkel, the company's VP of operations, to research different hedging opportunities and give recommendations whether the unsure effect of the fluctuating Canadian dollars on company's revenues can be minimized. However, Schenkel is uncertain on what hedging strategy to recommend or if he should recommend at all because hedging might either hurt or help Acpana's profits. WHICH VEHICLES DOES ACPANA HAVE AT ITS DISPOSAL FOR HEDGING? ASSUME ACPANA WILL NEED TO TRANSFER $200,000 US DOLLARS TO CANADIAN DOLLARS ON A REGULAR BASIS, CALCULATE THE IMPACT OF THESE DIFFERENT HEDGING STRATEGIES AGAINST A NAKED POSITION AT: a. 1 Cdn$=1 US$; b. 1 Cdn$=0.90 US$; c. 1 Cdn$=1.10 US$. Typically, the hedging strategies Acpana can decide on are basically forward contracts and option contracts. The former can lock in the amount of Canadian dollars that will be exchanged for U.S. dollars in the future, and the latter can exercise the income in U.S. dollars after the Canadian dollar appreciates. Although selling U.S. dollar options can make a profit when the Canadian dollar rises, there is a limit on the profit. Assuming that the same number of options are sold, if the exchange rate exceeds ask, the rise cannot completely hedge against the Canadian dollar rise. In general, selling options is not a hedging to reduce risk. Position A: 1 Cdn$=1 US$ The hedging strategies Acpana can decide on are basically forward contracts and option contracts. Assume: 1) Acpana needs to transfer US$200,000 from revenue to Canadian dollars on March 1st, 2011.
2) The current spot rate on March 1, 2011, is Cdn$0.9702/US$. 3) Using one-month forward contracts on March 1st, 2011. 4) No other transaction fees and cost for forward contracts. 5) Using April put or call options 6) Future Spot rate (et) = 1Cdn$/US$ 7) 1-Month Forward Delivery price (K) = Cdn$0.97374/US$ Therefore, et > K i.e., Cdn$1 > 0.97374