A small Canadian company has contracted to purchase 100,000 toys for £ 3.50 each from a British toy manufacturer. The Canadians have agreed to pay in pounds sterling. The Canadians have also agreed to sell the toys to a US company for $5.50 US per toy. The Canadian company has agreed to accept US dollars but plans to convert these revenues to Canadian dollars. The Canadian company estimates its marginal costs for warehousing, distribution, etc. is C$.75 per toy.
Exchange rates at the time of signing the agreements are as follows:
Canadian $1= US $0.80
Canadian $1= British pound .66
a) Is this a good deal for the Canadian company? Why or why not?
b) What impact would a devaluation of the US dollar relative to the Canadian dollar have on the Canadian company's profits? What impact would a revaluation upward have? use specific examples to illustrate your answer.
c) What impact would a devaluation of the British pound relative to the US dollar have on the Canadian company's profits? Use specific examples to illustrate your answer.
d) What could the Canadian company do to minimize its exchange rates?