Essay About Forward Contract Hedge And Acpana Business Systems

Acpana Business Systems – International Financial Management
Frame the issue        Acpana Business Systems Inc., a Canadian software development and backup-as-a-service provider located in Toronto, was founded in 2003 by Jamie Brenzel, Rob Schenkel and Tim Jewell. This company provides service through a core platform, Kinetic D, so that small and medium business could securely backup, restore and access their digital assets. Also, the customers who buy the products or service at this company can pay in US dollars only on its websites and both US dollars and Canadian dollars on Powered By and wholesale levels. Therefore, Brenzel is CEO of the company concerned that the recent volatility and appreciation of the Canadian dollar would affect Acpana’s revenue and undermining the company’s growth. Also, Schenkel who is a vice president of operation research different hedging opportunities and give recommendations whether the unsure effect of the fluctuating Canadian dollars on the company’s income might make minified. Hedging strategies         The hedging strategies Acpana can decide are basically forwards/future contracts and option contract. The Assumption is:Acpana need to transfer $200,000 US dollars to Canadian dollarsUsing one-month forward contractBuying April put optionUsing current spot rate from March 1st, 2011 is CAD0.9702/USDAssumptions are three options that the company can choose which is good for its:1 USD = ? CADMarch 1st, 2011April 1st, 2011Option 1Option 2Option 3Spot rate0.970211.11110.9091April Forward price0.9737411.11110.9091April 0.97374 put options0.973111.11110.9091        Option 1: 1 CAD = 1 USDIf Acpana does not hedge against the risk, then the Gain = (1 – 0.9702) x 200,000 = 5,960 CADIf hedging with:        Selling forward: (1 – 0.97374) x 200,000 = 5,252 CAD Gain        Buying put option:                 [(0.97374 – 1) x 200,000] – [0.9334% x 200,000] = 7,118.80 CAD Loss        The forward contract hedge offers the closest offset to the gain due to the relative decline of CAD.Option 2: 1 CAD = 0.90 USDIf Acpana does not hedge against the risk, then the Gain =                         (1.1111 – 0.9702) x 200,000 = 28,180 CADIf hedging with:        Selling forward: (1.1111 – 0.97374) x 200,000 = 27,472 CAD Gain