BusBoard Prototype Systems: Making Sense of Foreign Exchange

BusBoard Prototype Systems Ltd. (BusBoard), a company based in Calgary, Alberta, that designed and manufactured printed circuit boards targeted at the electronics hobbyist market, managed foreign-currency transactions on a transaction-by-transaction basis. The company’s general manager had been buying and selling CAD and USD while attempting to maximize the company’s value, timing transactions based on previous experience and professional judgment. This was challenging because she did not have any experience with currency futures or options, and she wondered if she could improve company performance by trading currencies differently. Exchange-rate volatility put constant pressure on her ability to make the best choice. The company paid most of its suppliers and received most of its payments from customers in USD. Highlighted in the case study is a recent transaction in which BusBoard ordered parts and supplies from a Taiwanese supplier, with 50 per cent payment due on contract negotiation and the remaining 50 per cent due on delivery. The general manager knew that developing a more effective way to manage currency transactions could play a big part in keeping the company profitable in the future.

This case is appropriate for courses in financial management in both undergraduate- and graduate-level programs. This case provides finance instructors with a teaching tool designed to help students understand currency exchange and currency options more deeply. The case also provides students with more knowledge about the challenges that smaller companies face with regard to currency exchange, where the company’s size might be a barrier to accessing appropriate hedging vehicles. After working through the case and teaching note, students will be able to do the following:<ul><li>Demonstrate the difference between total transaction value and net transaction value, as well as the concept of hedging net currency-exchange exposure.</li><li>Increase student understanding of hedging using futures and options.</li><li>Consider the potential benefits of incorporating currency-hedging financial instruments.</li><li>Analyze how a company can make itself stronger by using natural hedging opportunities.</li></ul>

• Currency exchange, small business