BUSBOARD PROTOTYPE SYSTEMS LTD.: MAKING SENSE OF
FOREIGN EXCHANGE CASE STUDY SOLUTION
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SYNOPSIS
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BusBoard Prototype Systems Ltd. (BusBoard), a company based in Calgary, Alberta, managed foreign-currency
transactions on a transaction-by-transaction basis. Since the company’s inception in 2002, Patti Kornak, the
general manager, had been buying and selling Canadian dollars (CAD) and US dollars (USD) while attempting
n
to maximize the company’s value, timing transactions based on previous experience and professional judgment.
This was challenging because Patti did not have any experience with currency futures or options, and she
tio
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
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BusBoard ordered parts and supplies from a Taiwanese supplier, with 50 per cent payment due on contract
So
The Case Solution Starts From page 4
,ASSIGNMENT QUESTIONS
1. BusBoard’s products target the electronics hobbyist market, primarily in the United States. What challenges
could the company’s choice of target market present to the implementation of a hedging strategy?
2. Is it possible for BusBoard’s current strategy for managing currency exchange to be effective? Discuss
the company’s size, its actual exposure to USD, and currency fluctuations.
3. How could the company hedge exposure using forward contracts?
4. How could the company hedge exposure using futures contracts? Futures contracts on the USD/CAD
exchange rate are available through the Chicago Mercantile Exchange (CME).
5. How could BusBoard hedge its exposure using options contracts? Calls and puts on the USD/CAD
exchange rate are available through the Montréal Exchange (MX).
6. BusBoard is a close affiliate of Kornak Technologies Inc. (KTI), a designer and manufacturer of custom
industrial electronics, machine-to-machine devices, and microcontroller-based products. KTI
customers are located in Canada and the United States, and the company’s head office is in Calgary,
Alberta, Canada. With sales in both countries, KTI has issues similar to BusBoard with regard to
e
currency translation. What are some potential opportunities and challenges for the two companies if
both were to actively hedge movements in the value of the USD/CAD exchange rate? Is it possible for
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hedging efforts at BusBoard to augment KTI’s risk?
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tio
lu
So
ANALYSIS
1. BusBoard’s products target the electronics hobbyist market, primarily in the United States.
What challenges could the company’s choice of target market present to the implementation of
a hedging strategy?
While the electronics hobbyist market is increasing in size, it still forms a small part of the US economy.
Within this space, BusBoard’s transactions are relatively small, with orders that are generally less than
US$50,000. It may be difficult for the company to find contracts of appropriate size, and the costs of
managing a hedging program could offset any potential gains.
At the time of this writing, it seemed as if trade policy in the United States might present a problem for BusBoard
in the near future. President Donald Trump’s call for renewed focus on American jobs and the implementation
of import tariffs and taxes had the potential to increase the cost of BusBoard’s products for US buyers, hurting
The Case Solution Starts From page 4
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pl
m
Sa
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6. BusBoard Prototype Systems is a close affiliate of Kornak Technologies Incorporated (KTI), a
tio
designer and manufacturer of custom industrial electronics, machine-to-machine devices, and
microcontroller-based products. KTI customers are located in Canada and the United States,
and the company’s head office is in Calgary, Alberta, Canada. With sales in both countries, KTI
faces similar issues as BusBoard with regard to currency translation. What are some potential
lu
opportunities and challenges for the two companies if both were to actively hedge movements
in the value of the USD/CAD exchange rate? Is it possible for hedging efforts at BusBoard to
So
augment risk for KTI?
If BusBoard were to hedge its currency exposure in isolation, without considering its parent company’s
exposure, it is possible that the currency risk for the group of companies could increase. BusBoard should
hedge in co-operation, or at least in communication, with KTI. An important goal in hedging would be to
lower overall currency-translation risk for the two companies together, not just manage a single company’s
risk. For example, BusBoard’s revenues increase when the value of the USD increases, and expenses
increase at the same time. KTI experiences the same effect, but it is possible that BusBoard and KTI could
be considering different parts of their respective operations. What if KTI were to purchase US$1,000 of
The Case Solution Starts From page 4
FOREIGN EXCHANGE CASE STUDY SOLUTION
e
pl
SYNOPSIS
m
Sa
BusBoard Prototype Systems Ltd. (BusBoard), a company based in Calgary, Alberta, managed foreign-currency
transactions on a transaction-by-transaction basis. Since the company’s inception in 2002, Patti Kornak, the
general manager, had been buying and selling Canadian dollars (CAD) and US dollars (USD) while attempting
n
to maximize the company’s value, timing transactions based on previous experience and professional judgment.
This was challenging because Patti did not have any experience with currency futures or options, and she
tio
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
lu
BusBoard ordered parts and supplies from a Taiwanese supplier, with 50 per cent payment due on contract
So
The Case Solution Starts From page 4
,ASSIGNMENT QUESTIONS
1. BusBoard’s products target the electronics hobbyist market, primarily in the United States. What challenges
could the company’s choice of target market present to the implementation of a hedging strategy?
2. Is it possible for BusBoard’s current strategy for managing currency exchange to be effective? Discuss
the company’s size, its actual exposure to USD, and currency fluctuations.
3. How could the company hedge exposure using forward contracts?
4. How could the company hedge exposure using futures contracts? Futures contracts on the USD/CAD
exchange rate are available through the Chicago Mercantile Exchange (CME).
5. How could BusBoard hedge its exposure using options contracts? Calls and puts on the USD/CAD
exchange rate are available through the Montréal Exchange (MX).
6. BusBoard is a close affiliate of Kornak Technologies Inc. (KTI), a designer and manufacturer of custom
industrial electronics, machine-to-machine devices, and microcontroller-based products. KTI
customers are located in Canada and the United States, and the company’s head office is in Calgary,
Alberta, Canada. With sales in both countries, KTI has issues similar to BusBoard with regard to
e
currency translation. What are some potential opportunities and challenges for the two companies if
both were to actively hedge movements in the value of the USD/CAD exchange rate? Is it possible for
pl
hedging efforts at BusBoard to augment KTI’s risk?
m
Sa
n
tio
lu
So
ANALYSIS
1. BusBoard’s products target the electronics hobbyist market, primarily in the United States.
What challenges could the company’s choice of target market present to the implementation of
a hedging strategy?
While the electronics hobbyist market is increasing in size, it still forms a small part of the US economy.
Within this space, BusBoard’s transactions are relatively small, with orders that are generally less than
US$50,000. It may be difficult for the company to find contracts of appropriate size, and the costs of
managing a hedging program could offset any potential gains.
At the time of this writing, it seemed as if trade policy in the United States might present a problem for BusBoard
in the near future. President Donald Trump’s call for renewed focus on American jobs and the implementation
of import tariffs and taxes had the potential to increase the cost of BusBoard’s products for US buyers, hurting
The Case Solution Starts From page 4
, e
pl
m
Sa
n
6. BusBoard Prototype Systems is a close affiliate of Kornak Technologies Incorporated (KTI), a
tio
designer and manufacturer of custom industrial electronics, machine-to-machine devices, and
microcontroller-based products. KTI customers are located in Canada and the United States,
and the company’s head office is in Calgary, Alberta, Canada. With sales in both countries, KTI
faces similar issues as BusBoard with regard to currency translation. What are some potential
lu
opportunities and challenges for the two companies if both were to actively hedge movements
in the value of the USD/CAD exchange rate? Is it possible for hedging efforts at BusBoard to
So
augment risk for KTI?
If BusBoard were to hedge its currency exposure in isolation, without considering its parent company’s
exposure, it is possible that the currency risk for the group of companies could increase. BusBoard should
hedge in co-operation, or at least in communication, with KTI. An important goal in hedging would be to
lower overall currency-translation risk for the two companies together, not just manage a single company’s
risk. For example, BusBoard’s revenues increase when the value of the USD increases, and expenses
increase at the same time. KTI experiences the same effect, but it is possible that BusBoard and KTI could
be considering different parts of their respective operations. What if KTI were to purchase US$1,000 of
The Case Solution Starts From page 4
