On January 2- Toyota plans to ship 25,000 Cars from its plant in Canada to the U

Question

On January 2- Toyota plans to ship 25,000 Cars from its plant in Canada to the United States. The cars will sell by car dealers at $38,000 each on 270-day terms. Thus Toyota will receive payments from the car dealers on Septemper 28.

Assume 1 US$ is equal to 1.30 Canadian Dollars

Toyota needs to cover its expenses in Canada and thus wants to hedge its Canadian Dollar (CD) exposure using a forward contract with a Canadian bank in the US.

What is the minimum amount of CD it should receive on September 28 given the 9 month (270 days) forward rate for 1 US Dollar in terms of CD?

What are two other ways Toyota can hedge their Canadian Dollar/ US$ exposure?

Explanation / Answer

Spot rate is US $ 1= Canadian $ 1.3

Total Sales 25000*38000=US $ 950,000,0000

Here Toyota's objective is to to recover US $ 950 Mn and to receive atleast US $ 950Mn * 1.3 = Canadian $ 1235 as on September 28.

To avoid volatillity in forex market, Toyota can enter into Forward Contract to sell Canadanian $ and buy US$ on September 28 to receive US $ 950 Mn by selling Canadian $ 1235 Mn and rate would be atleast 1235/950 = canadian $ 1.3/US $ 1. Here Interest for the period of 270 days has been ignored.

The other ways Toyota can hedge their Canadian Dollar/ US$ exposure are :

1. Hedging through Options

2. Hedging through Money Market

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