Question: Vogl Co. is a U.S. firm conducting a financial plan for the next year. It has no foreign subsidiaries, but more than half of its sales are from exports. Its foreign cash inflows to be received from exporting and cash outflows to be paid for imported supplies over the next year are shown in the following table:
The spot rates and 1-year forward rates as of today are shown below.
Assume that the Canadian dollar net inflows may range from C$20 million to C$40 million over the next year. Explain the risk of hedging C$30 million in net inflows. How can Vogl Co. avoid such a risk? Is there any tradeoff resulting from your strategy to avoid that risk?