Question Description: Suppose a U.S. wood-products company has facilities and employees in Canada providing its raw materials (wood), but has most of its sales in the United States.
(1) What are the most important operational and financial risks in this arrangement? (2) How can the company pay its Canadian employees, who presumably want Canadian dollars, when its U.S. customers are paying in U.S. dollars? Furthermore, how can it calculate its profit if revenue is in U.S. currency and most of its costs are in Canadian currency?
Answer preview
The Company can procure foreign currency dominated funds (Canadian dollars) to pay its employees. According to Min and Yang (2019), foreign currency dominated funds shield companies from exposure to exchange rate volatility. This means if the wood-product Company procures these funds, it will avoid losses resulting from conversion differences of converting US dollars paid by customers to Canadian dollars preferred by employees. Furthermore, this would ensure the Company collects actual profit from its sales.
How the Company can calculate its profits using hedging arrangements
The Company can use hedging arrangements such as forward exchange rate contracts. In these contracts, the Company can convert the revenues in Canadian dollars or the cost into US
