Pixonix Inc. - Addressing Currency Exposure

The chief financial officer of Pixonix Inc. is trying to decide if she should hedge, given the current strength of the Canadian dollar. Her company licenses proprietary software through a U.S. company that will cost $7.5 million in three months time. The case provides the students with the opportunity to understand the impact of exchange rate fluctuations on her firm's cash flows and some of the instruments available to manage risk, including puts and calls and forward contracts.

[Extract]
On Friday November 2, 2007, Mikayla Cain, chief financial officer of Pixonix Inc., sat in her office and pondered the impact of the strong Canadian dollar on her firm’s projected financial results. The Report on Business today stated that the Canadian dollar had hit another record, jumping to US$1.0717 from the previous day’s close of $1.0512 after a stronger-than-expected jobs report reduced the odds of an interest- rate cut. The Canadian dollar had already been the world’s best-performing major currency this year, increasing 25 per cent against the U.S. dollar and almost seven per cent in the past month alone. Cain knew she would have to understand the impact of the strong dollar on her firm’s cash flows and the tools available to manage the company’s currency risk.