EFB312

International Finance
Assignment

Student Name: Thi Khanh Van Nguyen

Student Number: 10701303
Word Count: 1674

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 Part A
1. Briefly explain BusBoard’s business model (e.g., products, suppliers,
customers). Draw a simple diagram that connects the firm, customers, suppliers,
and currency exposures.
BusBoard Prototype Systems Ltd has based in Calgary, Alberta, Canada. One of the
recent product innovations is Junior Genius Blinky Lights Kit which is an educational
electronic circuit kit. In addition, this company also distributes and models
complementary hobbyist parts and items for both US and Canada that concentrate on
electronics hobbyist market. BusBoard primary supplies were in South Korea and
Taiwan, some in China.

2. What is the strategy used by BusBoard’s management for dealing with foreign
exchange risk as of June 2019?
Busboard faced the transaction risk in June 2019 because of the ongoing changes in
currency. There are two options which was stated by Patti in a management meeting.
The first option is to continue to trade currency based on instinct. The second option is

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 to evaluate some types of financial contract. The important thing is to get started before
the exchange rate fluctuations. In detail, BusBoard has placed an order totalling
$US25000 from their own supplier with an exchange rate of 0.748. They paid 50% in
advance and making a partial payment at the time that the second half of the payment
become more expensive in the future.
3. Without hedging foreign exchange risk, what would likely happen to
BusBoard’s revenues if the U.S. dollar appreciated relative to the Canadian
dollar?
The market processes affected the exchange rate between two currencies. One of the
most crucial factors which affect the exchange rate between the USD and the CAD is oil
prices. When oil prices were high, Canadian companies’s in USD increased and CAD
tends to strengthen. In addition, inflation has an impact on the discrepancy between the
trading value of USD and CAD. Countries with high inflation rates tend to repel foreign
investment capital.
4. Do you think BusBoard would benefit from hedging foreign exchange risk in
today’s uncertain times due to Covid-19 pandemic? Clearly explain the potential
benefits and costs.
It is very important to decide which hedging strategies should be applied to reduce
foreign exchange risk in this pandemic period. For instance, forward contracts allow us
to buy or sell a defined amount at a defined date to avoid exchange rate fluctuations.
However, it lacks flexibility because of the volatility in the market during the COVID-19
pandemic. BusBoard should be careful in evaluating the hedging strategies. BusBoard
used both forward contracts and options to eliminate exchange rate risks. There are
both benefits and costs to these strategies. The obvious benefit is that it can minimize
uncertainty and return a certain amount which is safe for business because hedging can
lock in a set of exchange rates which is helpful to expect future cash flows. Another
benefit is that hedging can reduce the exposure due to sudden price movements. They
have call options which give the buyer the right to buy the stock while put options give
the buyer the right to sell.
Besides the favorable benefits, hedging also leads to the elimination of beneficial
fluctuations in the exchange rate. For example, when the party agrees to purchase
forward, if the price goes down, the party loses. In addition, a premium is necessary
when the contract is ordered which leads the buyer can lose all this premium if the value
of the currency does not change as expected. In conclusion, it would be helpful for
BusBoard to use currency hedge in this pandemic period. However, it should be crucial
for BusBoard to evaluate the market and modify their approaches properly.
5. Read the Harvard Business Review article “Why Diverse Teams Are Smarter.”
a. Provide three reasons (with short explanations) why workplace diversity helps
Multinational Corporations make better business decisions.

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 Decision-making is important for the development of the business. Promoting workplace
diversity within a company can positively impact the goal of making better business
decisions. A stock trading simulation found that ethnically diverse traders were more
likely to make better decisions (Levine., et al, 2014). Then, diversity in the workplace is
essential to create a thriving business, especially when it comes to employee
engagement. (Grossmann, 2021) due to the diverse backgrounds may adapt their
behaviour of a group’s social majority in ways that lead to improved and more accurate
group thinking. In addition, diverse team members can outperform homogeneous ones
in decision-making as they progress data correctly. Finally, gender plays a vital role in
keeping the business to be innovative. According to the research by Havard Business
Review, companies with more women were more likely to introduce radical added
information into market which led their decision to be objective and unbiased.
b. Do you believe that workplace diversity in corporate leadership is consistent
with the goal of maximizing shareholder wealth?
I agree with the view that workplace diversity in corporate leadership is useful in
maximizing shareholder wealth. A great deal of studies found that diversity had impacts
on business development. Diversity in gender is significant in board as more
researchers prove that diversity amongst board members can influence financial
performance (Carter et al., 2003). Another study found that the outcome of having a
diverse board will result in productivity, sustainability, and an improved brand and
reputation (Eisenstein, 2019) which can improve a business’s financial performance.
When business performance has been boosted, it is reasonable to conclude that
workplace diversity on board is consistent with shareholder wealth’s maximization.

Part B:
Assumption
Kits are made to order
Sales price: $12.5 per kit
Cost price: 2.75+4.5=7.25
Currency Bid rate Ask rate
Canadian(normal) US$0.76/CAD US$0.78/CAD
Canadian(safe) US$0.81/CAD US$0.82/CAD
Canadian (USD safe) US$0.68/CAD US$0.69/CAD
Canadian (forward) US$0.70/CAD US$0.71/CAD
Exercise price:C$1.295

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 Scenario Spot rate Premium paid Exercise per Received per
per option option unit (after
accounting for
premium)
Normal 0.78 0.025 yes 0.755
USD safe 0.69 0.025 No 0.665
haven
Canadian safe 0.82 0.025 yes 0.795
haven
1. You decided not to hedge BusBoard’s currency exposure. If the expected
final sales volume is 3000, what are your total revenues
a) if the exchange rate (bid-ask) remains at $0.76/C$ - $0.78/C$? Let’s call this the
baseline scenario.
3000*US$12.5 = US$37500
US$37500 / US$0.78/CAD= 48076CAD (base line)
b) if the investors consider the Canadian dollar a safe haven currency during the
pandemic? How does this compare to the baseline case?
US$37500 / US$0.82/CAD = 45731CAD
45731CAD/48076CAD=0.95< base line
c) if the investors consider the U.S. dollar a safe haven currency during the pandemic?
How does this compare to the baseline case?
US$37500 / US$0.69/CAD = 54348CAD
54348CAD/48076CAD=1.13> base line
2)Assume that you and the BusBoard’s management team decided to hedge
using forward contracts. Assume that the expected final sales volume is 3000.
What are your total revenues and the percentage gains/losses from hedging
(compared to no hedging)
a) if the exchange rate (bid-ask) remains at $0.76/C$ - $0.78/C$?
Expecting US$37500 to be received in 12 months.
Lock in the exchange rate with a forward
Receivables in $ * forward rate
US$37500 / $0.71/CAD = 52816CAD
Total revenue = 52816CAD - 48076CAD = 4740CAD compared to no hedging
Percentage gains = 9.8%

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 b) if the investors consider the U.S. dollar a safe haven currency during the pandemic?
Expecting US$37500 to be received in 12 months.
Lock in the exchange rate with a forward
Receivables in $ * forward rate
US$37500 / $0.71/CAD = 52816CAD
Total revenue = 54348CAD - 52816CAD = 1532CAD compared to no hedging
Percentage gains = 2.8%
3. Assume that you and the BusBoard’s management team decided to hedge
using option contracts. Assuming expected final sales volume is 3000, what are
your total revenues and the percentage gains/losses from hedging (compared to
no hedging)
a) if the exchange rate (bid-ask) remains at $0.76/C$ - $0.78/C$?
Purchase put options: C$0.025 * US$37500 = C$937.5
Would exercise as the put option is better US$37500 / C$1.295 = C$28957.5
Total: C$28957.5 - C$937.5 = C$28020
Total benefit: C$28957.5 - C$48076 - C$937.5 = -20056CAD
Percentage Cost = -4.6%
b) if the investors consider the U.S. dollar a safe haven currency during the pandemic?
Purchase put options: C$0.025 * US$37500 = C$937.5
Would not exercise the option as the spot rate is better US$37500 / US$0.69/C =
C$54348
Total benefit: C$54348-$C937.5=C$53410.5
Percentage Cost= 1.6%
4. Assume that the Scenario 2 (Pandemic) took place in 2020 and the Canadian
dollar became a safe haven currency during the pandemic. What are your cash
flows (profits) if you
a) do not hedge the exchange rate risk?
1. Cost of production: 1500 * C$7.25=C$10875
2. Sales of kits: 1500 * US$12.5 = US$18750
3. Convert USD to CAD: US$18750 / US$0.82/CAD = C$22866

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 4. Cash flow: C$22866-C$10875= C$11991(worst option)
b) hedge the exchange rate risk using forward contracts?
1. Cost of production: 1500 * C$7.25=C$10875
2. Sales of kits: 1500 * US$12.5 = US$18750
3. Exercise forward contract: US$18750/US$0.71/CAD=C$26408
4. Cash flow: C$26408- C$10875= C$15533 (best option)
c) hedge the exchange rate risk using options contracts?
1. Cost of production: 1500 * C$7.25=C$10875
2.Buy put option: C$0.025*$18750= C$468.75
3. Sales of kits: 1500 * US$12.5 = US$18750
4. Exercise put option: US$18750/C$1.295=C$14478.76
5. Cash flow: C$14478.76- C$468.75=C$14010.01
5. Assume that the Scenario 2 (Pandemic) took place in 2020 and the U.S. dollar
became a safe haven currency during the pandemic. What are your cash flows
(profits) if you
a) do not hedge the exchange rate risk?
1. Cost of production: 1500 * C$7.25=C$10875
2. Sales of kits: 1500 * US$12.5 = US$18750
3. Convert USD to CAD: US$18750/ US$0.69/CAD=C$27174
4.Cash flow: C$27174 - C$10875=C$16299
b) hedge the exchange rate risk using forward contracts?
1. Cost of production: 1500 * C$7.25=C$10875
2. Sales of kits: 1500 * US$12.5 = US$18750
3. Exercise forward contract: US$18750/US$0.71/CAD=C$26408
4. Cash flow: C$26408- C$10875= C$15533 (worst option)
c) hedge the exchange rate risk using options contracts?
1. Cost of production: 1500 * C$7.25=C$10875
2. Buy put option: C$0.025*$18750= C$468.75
3. Sales of kits: 1500 * US$12.5 = US$18750

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 4. Do not exercise option use spot rate US$18750/US$ 0.69/CAD=C$27173
5. Cash flow: C$27173- C$468.75=C$26704.25 (best option)

References
Carter, D., Simkins, B., & Simpson, W. (2003). Corporate
Governance, Board Diversity, and Firm Value. Financial Review, 38(1), 33–53.
https://doi.org/10.1111/1540-6288.00034
http://faculty.tamucc.edu/sfriday/wordpress/?wpfb_dl=579#:~:text=Hedging
%20Exposure%20to %20Receivables,to%20pay%20off%20the%20loan.
Eisenstein, L. (2019). The importance of diversity on
Boards. https://www.boardeffect.com/blog/importance-diversity-boards/
Grossmann, C. (2021). 5 ways to promote workplace diversity through employee
engagement. https://www.beekeeper.io/blog/5-ways-promote-workplace-
diversity/
Hambrick, D., Seung Cho, T., Chen, M., & Hambrick, D. (1996). The influence of top
management team heterogeneity of firm’s competitive moves. Administrative
Science Quarterly, 41(4), 659–684. https://doi.org/10.2307/2393871
Hutchinson, M., Mack, J., & Plastow, K. (2015). Who selects the “right” directors? An
examination of the association between board selection, gender diversity and
outcomes. Accounting and Finance, 55(4), 1071–1103.
https://doi.org/10.1111/acfi.12082
Sheen S. Levine, Evan P. Apfelbaum, Mark Bernard, Valerie L. Bartelt, Edward J.
Zajac, & David Stark. (2014). Ethnic diversity deflates price bubbles.
Proceedings of the National Academy of Sciences, 111(52), 1414–1433.
https://doi.org/10.1073/pnas.140730111

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