tcas - presentation
TRANSCRIPT
Global Vision Financial Advisors
================================
Vishwanath Nadgir Neeraj Narang
Mitigating FX Risks for TCAS Inc.
Agenda
• Company Background• Bid Summary & Analysis• Impact of FX Volatility • Exchange Rate Forecast • Hedging Alternatives • Conclusion
Company Background
1987 1988 1989 1990 1991 1992 1993 1994-500
0
500
1000
1500
2000
2500
3000
3500
Sales Net Income
1987 1988 1989 1990 1991 1992 1993 1994
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Net Profit Margin
• TCAS started as advisory Services ,Ventured into Computer Software• Large debt and only few contracts• Need for new customer base - “Go International”
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
16th May, 05Amount Received = C $ 290,000@ S 0
C $/US $ = C $ 1.3594
16th Aug, 05Expected Amount =C $2,610,000@ S t
C $/US $ = ?
Today 90 Days
Impact of FX Volatility
Revenue (1994) : $ 2.650 million Bid Amount : $ 2.057 millionMargin : 5%Share as per last years revenue :
78% !! This deal is probably the biggest ever in the company
history !!
CAD/ USD
<= Strong CAD
Strong USD =>
Exchange Rate Forecast
1.32
1.34
1.36
1.38
1.4
1.42
1.44
1.40271.3978
1.4168
1.4005
1.35531.3594 1.3604
Spot Rate CAD/USD
Expected (Aug16th)
Present Spot Rate
Expected 3 month spot rate (using RPP) 1.356415Expected 3 month spot rate (using FP and IRP) 1.364525Average Expected 3 month spot rate 1.36047
Hedging Alternatives
DO NOTHINGForward Contract
Foreign Currency Loan
Foreign Currency Futures
Pre-sale of Foreign Contract
Foreign Currency Buy PUT option
Foreign Currency Write
CALL optionTotal 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 HighEconomic Benefit (Rank) 2 4 6 3 5 7 1
Risk Factor
Exchange Rate
None Canadian Prime rateUS Short term interest rate
None LIBORCredit Spread for TCAS
Exchange rate risk limited to 0.0225 USD /CAD
Unlimited Exchange rate risk beyond 0.77810 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
Amount received on Aug 16th (in CAD) 2,610,000.00 Expected spot rate on Aug 16th 1.3605Amount received on Aug 16th (in USD) 1,918,454.72 PV of Amount received today 1,892,946.93 Total Amount received today 2,106,276.34 Margin 7.4986%
DO NOTHINGAmount due 2,610,000.00 Rate (CAD/USD) 1.3653Amount after 90 days (in USD) 1,911,667.77 Discount Rate (US Short Term Int Rate) 5.500%PV of Amt Received (USD) 1,886,250.21 Total Amount received (USD) 2,099,579.62 Profit Margin 7.157%
Forward Contract
Amount 2,610,000.00 Number Of Contracts 26.10 Cost per contract (USD) 50Contract Cost (USD) 1,305.00 Aug Future Price (USD/CAD) 0.735Cash inflow in August (USD) 1,918,350.00 PV of cash inflow in May (USD) 1,892,843.60 Total Amount Received 2,104,868.01 Profit Margin 7.42669%
Foreign Currency FuturesLoan Amount (CAD) 2,610,000.00 Spot Rate(CAD/USD) 1.3594 Amount Lent (USD) (less arrangement fee) 1,917,564.73 Interest Rate for loan (Canada Prime + 2.25%) 12.50%Interest Due after 90 days (CAD) 77,996.12 PV of Interest Incurred @ Using Canadian Short term int (CAD)76,670.03 PV of Interest Incurred @ Spot rate (USD) 56,399.91
PV of Cash flow (in USD) 2,074,494.24 Margin 5.88%
Foreign Currency Loan
Analyzing Alternatives - II
Amount received on Aug 16th (CAD) 2,610,000.00 Expected spot rate on Aug 16th 1.3605Strike Price (USD/CAD) 0.72Amount received on Aug 16th (USD) 1,879,200.00 PV of Amount Received on May16th (USD) 1,854,214.14
Put Premium (USD per CAD) 0.0225
Total Put Premium (USD) 58,725.00 Net Amount Received (USD) 2,008,818.55 Margin (Buy PUT option) 2.5246%
Put Premium (USD per CAD) 0.0356Total Put Premium (USD) 92,916.00 Net Amount Received (USD) 2,160,459.55 Margin (Write CALL option) 10.2639%
CALL and PUT Option
Amount to be Received in Aug (CAD) 2,610,000.00 Intest Charged by Export Finance Sub
LIBOR (Quarter) 1.7948471%Credit Spread for TCAS (Quarter) 0.4531604%Flat Upfront Fees 0.5%Interest Rate Charged by Export Finance Sub (Quarter) 2.7480%Interest Charged by Export Finance Sub (Quarter) 71,722.99 Interest Charged by Export Finance Sub (CAD) on May 16th 70,503.56
Cash Inflow on May 16th (CAD) 2,539,496.44 Cash Inflow on May 16th (USD) @ Spot rate 1,868,100.96 Total Received in USD today 2,081,430.37 Margin 6.23%
Pre Sale of Foreign Contract