...Pixonix Inc. ± Addressing currency Exposure Executive Summary Introduction Identification of Problems Pixonix is a Canadian company that makes major purchases in the United States. The American and Canadian dollars are always changing, and the company is faced with the difficult decision of how they will react to the constant change in currency exchange rates. Pixonix is very susceptible to failure and losses as a result of this fluctuating exchange rate. This is known as the foreign exchange risk. At present, the Canadian dollar is valued above the US. dollar, but if the Canadian dollar dips, it could have a unfavorable fiscal outcome for Pixonix when it comes time to purchasing new tools and software in US dollars. On the other side of this, if the Canadian dollar continues to rise above the US dollar, Pixonix may have trouble selling their products to US consumers. There are a number of ways that Pixonix can insure against the foreign exchange risk, but Cain has no previous experience in these strategies. Analysis of Problems The exchange rate fluctuation is a concern for any Canadian company because the US market also drives the Canadian market. That being said, Pixonix is affected by the exchange rate fluctuation specifically because it licensed tools and software for an annual cost of $7.5 US. This is a significantly different number in Canadian dollars if the exchange rate of $1 Canadian is worth $1...
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...recent trend of Canadian dollar strength and the tough economic times in the US, Cain should be worried about the upcoming exchange rate fluctuation for a number of reasons: 1. The US markets are continuing to rally back after the crisis. 2. The largest international trader in Canadian dollars, RBC, has raised its outlook on the US dollar, and predicts soon the two currencies will be at parity (trading at the same price or equivalent value). 3. In the past 30 years the Canadian dollar has traded stronger than the US dollar two separate times, 1974 and 2007. Each separate occasion of Canadian dollar strength compared to US dollar was met abruptly by a sharp decrease in value for the Canadian currency. 4. Cain’s company, Pixonix, while based in Toronto, Canada, was part of an organization...
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...PIXONIX INC. - Currency Exposure Answers Question #1 The company Pixonix Inc is based in Canada and its revenues are based in Canadian Dollars, however Pixonix dealt with US firms, so a majority of Pixonix's expenses were paid in US Dollars. Of key interest is the annual payment of US$7.5million at the end of January each year as well as the payments made at the end of June each year (which required the CAD to be converted to USD). Recently the Canadian Dollar has been appreciating and positively affecting Pixonix's profitability, however since some of the cash flows needed to be converted to USD Pixonix is exposed to currency exchange risk. Cain's dilemma is to choose between either to purchase a forward contract and lock the cost of the January US$7million. or to purchase call options for the USD for $7.5million, and which course of action will provide the highest benefit and lowest risk possible under different exchange rates. Should the CAD depreciate with respect to the USD Pixonix costs would be higher. Question #2 Various Hedging Options: a) Purchase a forward contract Cain can eliminate exchange rate risk by engaging in a forward contract by locking in the exchange rate for the CAD/USD. To benefit when purchasing a forward contract to sell CAD for USD, the CAD should have depreciated at the time of the payment relative to today. To benefit when purchasing a forward contract to buy USD for CAD, the USD should have appreciated at the time of the payment...
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...Pixonix was based in Canada - its revenues were denominated in Canadian dollars while a significant portion of its expenses were to be paid in USD. Thus, Pixonix had to convert its Canadian dollar cash flows into US dollars annually. Canadian dollar was strengthening and cash flow and profitability had been impacted positively. Cain was in a dilemma about what would happen to the value of CAD at the end of January when the company has to pay USD 7.5 million for licensing proprietary tools and software through a US company. In other words, she was worried about the effect the volatility in CAD would have on the company’s cash flows. Pixonix should hedge its USD position. In case if Pixonix does not hedge its USD liability, there is a possibility of it experiencing volatility in its cash flows. This could lead to two possible effects. First effect is that if CAD depreciates with respect to USD, Pixonix can make losses due to its unhedged currency exposure. On the other hand if CAD further appreciates with respect to USD (which is the more likely the case) then it will save on transaction costs of hedging and can benefit from the potential upside of CAD appreciation. Buying currency options is a more flexible form of hedging than setting up a foreign exchange contract. The instrument allows limited risk as in the case of non exercise of an option you only loose the option premium. Although options provide Pixonix with the flexibility it also has some...
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...sentence or two. Show details in an exhibit.) See attached. 4. Show how the total CAD cost at the end of January of hedging with an option varies under the three scenarios. (The total cost includes what you pay for the USD and what you pay for the option. You can combine this with the table in question 2.) Do you use a call or put option? Call option—pay 1.73/100 per unit in the contract (7.5m), in CAD → CAD 129,750. If exercise the call option, pay CAD 7,012,500. Total is CAD 7,142,250. 5. Should Pixonix hedge? (A sentence or two.) Pionix is not, it appears, well placed to bear the FX risk. Risk is pretty big in CAD terms, and Pionix may be small and its shareholders undiversified … 6. Should Pixonix hedge with a forward contract or with an option? (One sentence should do.) Hedge forward. 7. Play the devil's advocate. How would you make the case that paying the premium on an option now to gain the upside potential in the future is not likely to be a wise move for Pixonix? What information would the case have to give you to make you think speculating with an option might be a good idea? Why hedge forward? The option is a guarantee that the most you pay is the forward price. But the option also charges you CAD 129,750 on the gamble that the CAD price of the USD in...
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...w rP os t S 908N13 PIXONIX INC. - ADDRESSING CURRENCY EXPOSURE op yo 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. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Copyright © 2008, Ivey Management Services Version: (A) 2008-06-05 THE COMPANY tC 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 interestrate cut. The Canadian dollar had...
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...New Third World, Norton, 2011 Calculator: A calculator is required. A financial calculator would be preferable, as it would have functions for bond valuation, net present valuation (NPV), internal rate of return (IRR), present value (PV), and future value (FV). A suitable calculator, the HP10-B, is available in the bookstore for about $30. Harvard Business School Cases https://cb.hbsp.harvard.edu/cbmp/access/17920074 The above is the URL for Harvard Business School so that you can obtain discounted student pricing for the cases: Group Ariel S.S.: Parity Conditions and Cross-Border Valuation (Note that there is no need to purchase the audio version of this case.) Pixonix Inc. Addressing Currency Exposure Recommended: 1. Subscription to the Wall Street Journal. Several class sessions will utilize information from the Wall Street Journal. See syllabus for the dates. 2. Subscription to or regular reading of the Financial Times....
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