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TCAS, INC.
On May 16, 1995, Mr. John Christopher, the assistant treasurer of TCAS, Inc.,
pondered several foreign exchange hedging ahernatjves that had been oudined by
the account manager from his lead bank. Mr. ChristOpher had called his account
manager, Judy Wright, to ask for her advice regarding a Canadian dollar contract
Mr. Christopher had negotiated with a Canadian company. Ms. Wright, after first
cvaluaring macroeconomic fundamentals and determining what her bank's lending
rates were likely to be based on this outlook, was now ready to advise Me. Christopher
of the various alternatives to hedge the foreign currency risk.
Company Background
TeAS (Transnationa! Corporate Advisory Services), Inc. was founded in 1982 as a
financial rraining alld consulcing firm incorporated in Delaware. hs primary assets
and produces were the knowledge and skills of the three foullding partners. All
three had worked for the Continenral Illinois Narional Bank for about twelve years
but left rhe bank before its problems in 1984. The expertise of the three founders
was multinational business management including the financial, production, and
marketing aspects of doing business globally.
In 1988, TCAS merged with Computer Software and Systems Company to
exrend its products to include managemem information systems. TCAS, Inc. was
involved in developing specialized software and building custom-designed, local
area personal com purer networks [or small- and medium-sized companies. Because
of the dramatic changes in computer technology and communication during the
decade of the \ 980s, the deregulation of financial markets, and the increased emphasis
on globalization, TeAS, Inc. experienced rapid growrh in net income and assets.
However, beginning in 1993, TCAS began to face sharply increased competition
from much larger corporations rhat began to sell very competitively priced services.
As a resull of these developments, TCAS's net income narrowed dramatically in
1993 and 1994. The company was heavily in debt and had only a few conrracts
in hand. TeAS was headquartered in Phoenix, Arizona, and its customer base
to date had been comprised totally of us companies. TCAS decided that it was
time to "go international."
John Christopher recognized that the submission of rhe bid in Canadian dollars
to a Canadian customer was fundamentally a risky step for TCAS. He also realized
Copyright © 1998, 1996 Thurtdt7bird, The American Cradullle School ofIrtteTnational ManagemEnt. All
rights mETwd. This cttJe wttJ pepard by F. joh" Mathis andja me> L MtliJ for the purpOSE ofclassroom
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EXHIBIT J TeAS, Inc.
ASSETS
Current assets: (US$ 000)
Cash <lod securities 250.0
Accounts receivable 620.0
Inventoties 80.0
Total current assets 950.0
Property. plant and equipme'nt
CoST 2240.0
less Accumulated depreciation (330.0)
Goodwill and int<lngibles 520.0
LIABILITIES
Current liabilities
Bank loans 810.0
Accounts payable 480.0
NOTes payable 120.0
Long-term liabilities
Debt 620.0
that) in order (Q survive, (he company had w expand its rraditional customer base. John
Christopher was surprised when TeAS was awarded the bid. He knew that his foreign
exchange worries had JUSt begun and he was in need of expert help.
Design 300,000
Materi.;lls 779,187
Llbor & inslaIlation 724,500
Shipping 32,466
Direer overhead 84,000
Allocation or indirect overhead 32,100
Sub-total 1,959,353
Mark-up (5%) 97,967
TOTAL BID US$ 2,057,320
Conversion to C$ al March 21 S Ot rate or 1US$ = Canadian $ \ .40% C '2 00 000
The Canadian dollar had remained relatively Slable againSl the US$ until
mid-Aped 1995. Ie declined (Q the low registered on May 2 and recovered slightly by
mid-May. Mr. Christopher was concerned thar the Canadian dollar might depreciate
agains{ rhe US$ during the next 90 days before he received his final payment
from the Canadian government agency. Mr. Christopher wanted to know what
a)rernatives were available to him to reduce the foreign exchange risk associated with
{he outstanding Canadian dollar conrracc
3. Foreign currency options-This instrument would give TeAS the right co either
purchase (call) or sell (put) an asset at a specified price at a date in the future
(European style) or anytime between the purchase date and a date in the future
(American style). The buyer of an option has the right bur not the obligation to
exercise the oprion. The buyer of an option has a choice whether to exercise rhe
option aod either receive the asset (call) or deliver the asset (put) or to allow the
option to expire unexercised. The seller (writer) of the option must stand ready
to fulfill an option obligation and surrender an asset on demand (call) or receive
an asset on demand (pur). Since TCAS had a Canadian dollar Contract, it could
hedge this foreign currency exposure by buying a Canadian dollar put or writing
a Canadian dollar call. Buying a Canadian dollar pur option would protect TCAS
from an unFavorable downward movement in the Canadian dollar exchange
rate while allowing the company to beneot from any further appreciation in the
Canadian dollar. The purchase of a currency option would require that Mr.
ChristOpher pay Ms. Wright an option premium at the time the contract was
entered into. At the time. the 90-day currency options premium rates on a strike
of 1 Canadian dollar'" US$ .7200 (or implied 1USdollar '" Canadian dollar
1.3888) were: call premium-US dollar O.0356/Canadian dollar; pur premium
-= US dollar O.0225/Canadian dollar. Note that the options are quoted as the US
dollar price of one Canadian dollar which is the reciprocal of the Canadian dollar
price of one US dollar. Writing a Canadian dollar call oprion would allow TeAS
to benefit if there was little or no change in the value of the Canadian dollar.
Instead of paying a premium, TCAS would receive the premium.
of this weakening of final demand on the Canadian GOP was offset somewhat by a
substancial accumulation of inventories.
The Canadian unemployment race remained broadly stable in the 9-1/2%
range. Persistent labor-market slack kept wage inoeases low, and unit labor cOSts
hardly rose. Slower outpur groWlh has been associated wi eh smaller productivity gains.
Overall, che rate of inflation had begun to ease.