Tcas Case Analysis in Order Term Paper

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Given this, and that they have received a boost in profit on this project based on favorable interest rate fluctuation over the bid period, it would be best to enter into a hedge in order to lock in some of these profits.

A forward contract would lock in a profit of $165,643 on the project. The risk would be fully hedged at this point.

A foreign currency loan replaces fully hedges the risk as well. The cost is the interest paid of $81,562.50 and the fee paid of $3,262.50. The profit would be based on today's spot rate, less the combined fees of $84,825. Thus, the total profit of this option would be $173,406.

Buying a put would cost $58,725 and lock in a worst-case rate of 1.3888, which yields a profit of $133,296.20. The upside is technically the full value of the contract should the Canadian dollar strengthen infinitely. Writing a call would generate $92,916 for a maximum profit of $226,212.20. There would be downside risk, however, that could significantly erode this profit. Because writing a call does not hedge the downside risk, it is not a viable option for TCAS.

A foreign currency future contract would cost $1,300, given 26 contracts.

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This yields a profit of $163,676, not including the remaining $10,000 that would be unhedged since each futures contract comes in an increment of $100,000.

The pre-sale of a foreign contract has a cost for the 90-day period of $60,030 plus a transaction fee of $13,050 for a total cost of $73,080. This is based on today's spot, giving a profit of $100,860.

A tunnel forward has no upfront cost and gives a partial hedge. The best case scenario is a profit of $220,092.50 and the worst case is a profit of $115,735.00.

I would recommend that TCAS take out a foreign currency loan. They have a tough competitive environment and an eroded customer base. The outlook for the Canadian dollar is not favorable for TCAS. In addition, each option with a fixed downside gives TCAS a profit higher than was anticipated when the bid was first submitted of $97,968.20. To take any of the fixed-downside options would be to lock in some of the gains already won.

Given this, the best option is to lock in as much of the….....

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