Kettle 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
Question: The current spot rate is used by Kettle 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.