Mitigating FX Risks for TCAS Inc.

Global Vision Financial Advisors

================================

Vishwanath Nadgir
Neeraj Narang
 Agenda

• Company Background
• Bid Summary & Analysis
• Impact of FX Volatility
• Exchange Rate Forecast
• Hedging Alternatives
• Conclusion
 Company Background

• TCAS started as advisory Services ,Ventured into Computer Software

• Large debt and only few contracts
• Need for new customer base - “Go International”

3500
60%
3000
50%
2500
40%
2000
30%
1500
20%
1000
10%
500
0%
1987 1988 1989 1990 1991 1992 1993 1994
0
1987 1988 1989 1990 1991 1992 1993 1994 -10%
-500
-20%
Sales Net Income
Net Profit Margin
 Bid Summary & Analysis
• Project’s Cost = US $1,959,353
• Mark Up = 5%
• Total Bid = US $ 2,057,320 or C $ 2,900,000 @ S 0C $/US $ = C $ 1.4096

Today 90 Days

16th May, 05 16th Aug, 05

Amount Received = C $ 290,000 Expected Amount =C $2,610,000
@ S 0C $/US $ = C $ 1.3594 @ S tC $/US $ = ?
 Impact of FX Volatility

<= Strong CAD

CAD/ USD

Strong USD =>

Revenue (1994) : $ 2.650 million
Bid Amount : $ 2.057 million
Margin : 5%
Share as per last years revenue : 78% !!

This deal is probably the biggest ever in the company history !!

 Exchange Rate Forecast

1.44
Expected 3 month spot rate (using RPP) 1.356415
1.42 Present Spot Expected 3 month spot rate (using FP and IRP) 1.364525
1.42 Rate Average Expected 3 month spot rate 1.36047
1.4
1.4 1.4
1.4
Expected
1.38
(Aug16th)
1.36
1.36
1.36
1.3604
1.34

1.32
3-Jan 7-Feb 7-Mar 4-Apr 2-May 15-May 16-Aug

Spot Rate CAD/USD

 Hedging Alternatives

Foreign Pre-sale of Foreign Foreign

Forward Foreign
DO NOTHING Currency Foreign Currency Buy Currency Write
Contract Currency Loan
Futures Contract PUT option CALL option
Total Cost for TCAS (in USD) 1,959,353.00 1,959,353.00 1,959,353.00 1,959,353.00 1,959,353.00 1,959,353.00 1,959,353.00
PV of Cash Inflow 2,106,276.34 2,099,579.62 2,074,494.24 2,104,868.01 2,081,430.37 2,008,818.55 2,160,459.55
Margin 7.50% 7.16% 5.88% 7.43% 6.23% 2.52% 10.26%
Risk Level Very High Zero Medium Zero Medium Low High
Economic Benefit (Rank) 2 4 6 3 5 7 1
Exchange None Canadian Prime None LIBOR Exchange rate Unlimited
Rate rate Credit Spread risk limited to Exchange rate
US Short term for TCAS 0.0225 USD risk beyond
interest rate /CAD 0.77810
Risk Factor USD/CAD

Foreign Currency Futures gives the maximum

profit margin while minimizing risk
Analyzing Call and Put Options
 Conclusion
• TCAS has been experiencing shrinking profit margins and declining
revenues
o They need the new CCC project to be executed profitably

• Current bid does not mitigate risk due to foreign exchange rate fluctuations

• We recommend implementing the Foreign Currency Futures

alternative to minimize risk and increase profit margins
Appendix
Current Economic Scenario

Canada US
 Analyzing Alternatives - I

DO NOTHING Forward Contract

Amount received on Aug 16th (in CAD) 2,610,000.00 Amount due 2,610,000.00
Rate (CAD/USD) 1.3653
Expected spot rate on Aug 16th 1.3605
Amount after 90 days (in USD) 1,911,667.77
Amount received on Aug 16th (in USD) 1,918,454.72
Discount Rate (US Short Term Int Rate) 5.500%
PV of Amount received today 1,892,946.93 PV of Amt Received (USD) 1,886,250.21
Total Amount received today 2,106,276.34 Total Amount received (USD) 2,099,579.62
Margin 7.4986% Profit Margin 7.157%

Foreign Currency Loan Foreign Currency Futures

Loan Amount (CAD) 2,610,000.00 Amount 2,610,000.00
Spot Rate(CAD/USD) 1.3594
Number Of Contracts 26.10
Amount Lent (USD) (less arrangement fee) 1,917,564.73
Interest Rate for loan (Canada Prime + Cost per contract (USD) 50
2.25%) 12.50% Contract Cost (USD) 1,305.00
Interest Due after 90 days (CAD) 77,996.12 Aug Future Price (USD/CAD) 0.735
PV of Interest Incurred @ Using Canadian Short term int (CAD)
76,670.03 Cash inflow in August (USD) 1,918,350.00
PV of Interest Incurred @ Spot rate (USD) 56,399.91 PV of cash inflow in May (USD) 1,892,843.60
Total Amount Received 2,104,868.01
PV of Cash flow (in USD) 2,074,494.24
Margin 5.88% Profit Margin 7.42669%
 Analyzing Alternatives - II

Pre Sale of Foreign Contract CALL and PUT Option

Amount to be Received in Aug (CAD) 2,610,000.00 Amount received on Aug 16th (CAD) 2,610,000.00
Intest Charged by Export Finance Sub Expected spot rate on Aug 16th 1.3605
Strike Price (USD/CAD) 0.72
LIBOR (Quarter) 1.7948471%
Amount received on Aug 16th (USD) 1,879,200.00
Credit Spread for TCAS (Quarter) 0.4531604%
PV of Amount Received on May16th (USD) 1,854,214.14
Flat Upfront Fees 0.5%
Put Premium (USD per CAD) 0.0225
Interest Rate Charged by Export Finance Sub (Quarter) 2.7480%
Interest Charged by Export Finance Sub (Quarter) 71,722.99 Total Put Premium (USD) 58,725.00
Interest Charged by Export Finance Sub (CAD) on May Net Amount Received (USD) 2,008,818.55
16th 70,503.56 Margin (Buy PUT option) 2.5246%
Cash Inflow on May 16th (CAD) 2,539,496.44
Put Premium (USD per CAD) 0.0356
Cash Inflow on May 16th (USD) @ Spot rate 1,868,100.96 Total Put Premium (USD) 92,916.00
Total Received in USD today 2,081,430.37 Net Amount Received (USD) 2,160,459.55
Margin 6.23% Margin (Write CALL option) 10.2639%