FIN 640 Group Project

Based on the material in the course and other research which you conduct, answer the 6 questions following the data on Jones Company. If you use additional sources of information from outside the course, be sure to identify those sources. BE SURE TO SHOW AND LABEL ALL OF YOUR CALCULATIONS.

Jones Company is a U.S. firm preparing its financial plan for the upcoming year. It has no foreign subsidiaries, but the majority of its sales are from exports to Australia, Canada, Argentina and Taiwan. Estimated foreign cash inflows to be received from exports and foreign cash outflows to be paid for imports over the next year are shown below:

Currency Total Inflow Total Outflow
Australia dollars (A$) A$33,000,000 A$3,000,000
Canada dollars (C$) C$6,000,000 C$2,000,000
Argentina pesos (AP) AP12,000,000 AP11,000,000
Taiwan dollars (T$) T$5,000,000 T$9,000,000

Today’s spot rates and one-year forward rates in US$ are as follows:

Currency Spot Rate One-Year Forward Rate
A$ $ .91 $ .94
C$ .61 .60
AP .19 .16
T$ .66 .65

1. Based on the data shown, What net foreign exchange exposure does Jones face for each foreign currency, stated in dollars?

2. The current spot rate is used by Jones as a forecast of the future spot rate one year from now. The C$, AP, and T$ are expected to move in tandem with the U.S. dollar during the upcoming year. The A$’s movements are expected to be independent of the movements of the other currencies. As exchange rate movements are difficult to predict, the estimated net dollar cash flows per currency may differ from the estimates. Could the exchange rate movements from whatever exchange rate movements do occur offset each other? Explain. Be specific.