2505
Information:
Assignment BUSI 2
Due 11 August 2011
2 (b) International Finance:
CAE (TSX: CAE; NYSE: CAE) is a global leader in modeling, simulation and training for civil
aviation and defence. The company employs more than 7,500 people at more than 100 sites and
training locations in more than 20 countries. Through CAEs global network of 32 civil aviation,
military and helicopter training centres, the company trains more than 80,000 crewmembers
yearly. CAE is based in Montreal, Quebec.
The customized solution for a seamless training experience
The CAE 7000 Series full-flight simulator (FFS) is ideally suited to the most customized needs
and surpasses Level D regulatory requirements. Its high fidelity and reliability have earned it
recognition as the gold standard the world over. Now it has raised the bar again with new
features and options, including a state-of-the-art all-electric motion system and PC-based image
control (ATC) environment simulation.
CAE is confident its new flight simulator for the Boeing 787 will be popular in Europe. CIBC
World Markets (an Investment Bank) is advising CAE on managing foreign exchange exposure.
Each CAE 7000 flight simulator sells for CAD $20 million. CAE expects to deliver one (1) per
month over the next year. Sales commissions are 5%. Each customer will pay sixty days (60
days) after it takes delivery. This permits installation and testing, prior to payment.
CAE`s gross is margin 30%. See:
http://www.cae.com/en/investors/_pdf/2011/CAE_Annual_Report_2011.pdf
This inverted means the production costs are 70% of the sales price for each flight simulator. As
production is in Montreal, Canada, the manufacturing costs are in Canadian dollars.
CIBC World Markets is telling CAE the spot market for Euros is now at 1.3748. However, the
relationship between Canadian dollars and Euros is highly volatile. See the chart below:
Euro versus Canadian Dollar, 1 August 2011
Source: http://www.x-rates.com/d/EUR/CAD/graph120.html
CIBC World Markets suggests the average over the past six months is 1.3750. Hence the spot
price quoted.
The Bank of Canada publishes inflation rates. Currently inflation is Canada is 3.70% annually.
And inflation in Europe is 2.5% (on average). Benchmark German bonds yield 1.11% for a one
(1) year maturity; with Government of Canada bonds yield 1.50% also for one (1) year maturity.
Now; CIBC World Markets also informs CAE that it could hedge exposure of the Canadian
Dollar to Euro`s by locking in 1.3750 over the next year. If CAE sells a simulator for $20
million CAD $, approximately 14,545,454.55 then CIBC World Markets will convert the
Euros back to CAD Dollars.
Questions:
1) If 1.375 CAD $ - Euro 1, is CIBC World Markets proposal fair to CAE?
2) What happens to CAE`s sales and profits if the Euro moves back to 1.4200?
3) Should CAE hedge the next year`s sales?