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
Jones recognizes that its year-to-year hedging strategy hedges the risk only for a given year. It does not insulate Jones from long-term trends in the A$’s value. Jones has considered establishing a subsidiary in Australia. The completed goods would be sent from the U.S. to the Australian subsidiary for distribution. The proceeds received would be reinvested by the subsidiary in Australia This would eliminate the need for Jones to convert A$ to US$ each year. Does this strategy eliminate its exposure to exchange rate risk? What other exchange related exposures might be created if this strategy is implemented? Explain. Be specific.