Global Vision Financial Advisors

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Vishwanath Nadgir Neeraj Narang

Mitigating FX Risks for TCAS Inc.

Agenda

• Company Background• Bid Summary & Analysis• Impact of FX Volatility • Exchange Rate Forecast • Hedging Alternatives • Conclusion

Company Background

1987 1988 1989 1990 1991 1992 1993 1994-500

0

500

1000

1500

2000

2500

3000

3500

Sales Net Income

1987 1988 1989 1990 1991 1992 1993 1994

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Net Profit Margin

• TCAS started as advisory Services ,Ventured into Computer Software• Large debt and only few contracts• Need for new customer base - “Go International”

Bid Summary & Analysis

• Project’s Cost = US $1,959,353• Mark Up = 5%• Total Bid = US $ 2,057,320 or C $ 2,900,000 @ S 0C $/US $ = C

$ 1.4096

16th May, 05Amount Received = C $ 290,000@ S 0

C $/US $ = C $ 1.3594

16th Aug, 05Expected Amount =C $2,610,000@ S t

C $/US $ = ?

Today 90 Days

Impact of FX Volatility

Revenue (1994) : $ 2.650 million Bid Amount : $ 2.057 millionMargin : 5%Share as per last years revenue :

78% !! This deal is probably the biggest ever in the company

history !!

CAD/ USD

<= Strong CAD

Strong USD =>

Exchange Rate Forecast

1.32

1.34

1.36

1.38

1.4

1.42

1.44

1.40271.3978

1.4168

1.4005

1.35531.3594 1.3604

Spot Rate CAD/USD

Expected (Aug16th)

Present Spot Rate

Expected 3 month spot rate (using RPP) 1.356415Expected 3 month spot rate (using FP and IRP) 1.364525Average Expected 3 month spot rate 1.36047

Hedging Alternatives

DO NOTHINGForward Contract

Foreign Currency Loan

Foreign Currency Futures

Pre-sale of Foreign Contract

Foreign Currency Buy PUT option

Foreign Currency Write

CALL optionTotal Cost for TCAS (in USD) 1,959,353.00 1,959,353.00 1,959,353.00 1,959,353.00 1,959,353.00 1,959,353.00 1,959,353.00 PV of Cash Inflow 2,106,276.34 2,099,579.62 2,074,494.24 2,104,868.01 2,081,430.37 2,008,818.55 2,160,459.55 Margin 7.50% 7.16% 5.88% 7.43% 6.23% 2.52% 10.26%Risk Level Very High Zero Medium Zero Medium Low HighEconomic Benefit (Rank) 2 4 6 3 5 7 1

Risk Factor

Exchange Rate

None Canadian Prime rateUS Short term interest rate

None LIBORCredit Spread for TCAS

Exchange rate risk limited to 0.0225 USD /CAD

Unlimited Exchange rate risk beyond 0.77810 USD/CAD

Foreign Currency Futures gives the maximum profit margin while

minimizing risk

Analyzing Call and Put Options

Conclusion

• TCAS has been experiencing shrinking profit margins and declining revenues o They need the new CCC project to be executed profitably

• Current bid does not mitigate risk due to foreign exchange rate fluctuations

• We recommend implementing the Foreign Currency Futures alternative to minimize risk and increase profit margins

Appendix

Current Economic Scenario

Canada US

Analyzing Alternatives - I

Amount received on Aug 16th (in CAD) 2,610,000.00 Expected spot rate on Aug 16th 1.3605Amount received on Aug 16th (in USD) 1,918,454.72 PV of Amount received today 1,892,946.93 Total Amount received today 2,106,276.34 Margin 7.4986%

DO NOTHINGAmount due 2,610,000.00 Rate (CAD/USD) 1.3653Amount after 90 days (in USD) 1,911,667.77 Discount Rate (US Short Term Int Rate) 5.500%PV of Amt Received (USD) 1,886,250.21 Total Amount received (USD) 2,099,579.62 Profit Margin 7.157%

Forward Contract

Amount 2,610,000.00 Number Of Contracts 26.10 Cost per contract (USD) 50Contract Cost (USD) 1,305.00 Aug Future Price (USD/CAD) 0.735Cash inflow in August (USD) 1,918,350.00 PV of cash inflow in May (USD) 1,892,843.60 Total Amount Received 2,104,868.01 Profit Margin 7.42669%

Foreign Currency FuturesLoan Amount (CAD) 2,610,000.00 Spot Rate(CAD/USD) 1.3594 Amount Lent (USD) (less arrangement fee) 1,917,564.73 Interest Rate for loan (Canada Prime + 2.25%) 12.50%Interest Due after 90 days (CAD) 77,996.12 PV of Interest Incurred @ Using Canadian Short term int (CAD)76,670.03 PV of Interest Incurred @ Spot rate (USD) 56,399.91

PV of Cash flow (in USD) 2,074,494.24 Margin 5.88%

Foreign Currency Loan

Analyzing Alternatives - II

Amount received on Aug 16th (CAD) 2,610,000.00 Expected spot rate on Aug 16th 1.3605Strike Price (USD/CAD) 0.72Amount received on Aug 16th (USD) 1,879,200.00 PV of Amount Received on May16th (USD) 1,854,214.14

Put Premium (USD per CAD) 0.0225

Total Put Premium (USD) 58,725.00 Net Amount Received (USD) 2,008,818.55 Margin (Buy PUT option) 2.5246%

Put Premium (USD per CAD) 0.0356Total Put Premium (USD) 92,916.00 Net Amount Received (USD) 2,160,459.55 Margin (Write CALL option) 10.2639%

CALL and PUT Option

Amount to be Received in Aug (CAD) 2,610,000.00 Intest Charged by Export Finance Sub

LIBOR (Quarter) 1.7948471%Credit Spread for TCAS (Quarter) 0.4531604%Flat Upfront Fees 0.5%Interest Rate Charged by Export Finance Sub (Quarter) 2.7480%Interest Charged by Export Finance Sub (Quarter) 71,722.99 Interest Charged by Export Finance Sub (CAD) on May 16th 70,503.56

Cash Inflow on May 16th (CAD) 2,539,496.44 Cash Inflow on May 16th (USD) @ Spot rate 1,868,100.96 Total Received in USD today 2,081,430.37 Margin 6.23%

Pre Sale of Foreign Contract