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Pixonix

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Pixonix Inc. ± Addressing currency Exposure |BPP/ FIN 422 International Economics and Finance ||JatinBelaniSiddharthLadsariyaMansiShahHimaniShethHarmeetSinghJayantVerma |||Executive SummaryPixonix was a graphic design company that operated in Toronto, Canada. Pixonix licensedproprietary tools and software through a US Company at an annual cost of USD 7.5 mn. SincePixonix was based in Canada, its revenues were based in Canadian dollars and expenses had tobe paid in USD. Pixonix was required to make payments at the end of June each year and had toannually convert CAD cashflows into USD. Recently the CAD was strengthening andcompany¶s profitability had been impacted positively. The outlook on the CAD for the futurewas that the CAD was expected to appreciate during the first half of the next year. CFO MikaylaCain was worried about the effect the volatility in CAD would have on the company¶s cashflows. To address the firms currency exposures Cain was considering two strategies ± purchaseforward contracts and purchase USD call options. This document analyses the benefits andtradeoffs of using currency forward / options from the prospective of Pixonix.Implication of leaving the USD exposure unhedgedIn case if Pixonix does not hedge its USD liability, there is a possibility of it experiencingvolatility in its cash flows. This could lead to two possible effects. First effect is that in case if CAD depreciates with respect to USD, Pixonix can make losses due to its unhedged currencyexposure. One the other hand in case if CAD further appreciates with respect to USD (which isthe more likely case) then they will save on the transaction costs of hedging and can benefit fromthe potential upside of CAD appreciation.Refer to Appendix 1 for detailed calculations.We have considered 3 different scenarios with different currency exchange rates. Now todetermine whether we are making a…...

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