Case Study- Voyages Soleil: The Hedging Decision Questions for Case Study 6: (i) Given the information in the case, how does the future of the Canadian travel industry look over the next six months? Over the next year? (ii) Do you expect the value of the Canadian dollar to increase / decrease / not change over the next six months? Over the next one year? (iii) As an advisor to Dupis, what would you suggest that he do regarding the foreign exchange risk associated with this contract?

1. International Finance
Case Study 6
Voyages Soleil : The Hedging Decision
GROUP 9
AD I T I S H E T T Y ( 2 2 - M F - 3 6 )
V R AT I K A S O L AN K I ( 2 2 - M F - 3 7 )
L AX M I S O N WAN E ( 2 2 - M F - 3 8 )
V I S H AL U R K U D E ( 2 2 - M F - 3 9 )
E AS H A PAL S O K AR ( 2 2 - M F - 4 0 )

2. Case Snapshot
1.Company Overview:
1. Voyages Soleil (VS) is a prominent tour operator based in Quebec, specializing in
packaged vacations to the Caribbean and South America.
2. Established in 1975, VS has experienced significant growth and established strong
relationships with customers and suppliers.
2.Industry Analysis:
1. The Canadian tour operating sector witnessed robust expansion until the
repercussions of 9/11 disrupted the travel industry, leading to decreased demand
and heightened competition.
2. VS, though experiencing a slight decline, remained a key player in the industry
despite the bankruptcy of smaller firms.
3.Economic Environment:
1. Despite challenges post-9/11, the Canadian economy remained relatively stable
with positive GDP growth and declining interest rates.
2. However, the Canadian dollar depreciated against the US dollar due to various
factors including economic conditions and geopolitical events.

3. Case Snapshot (continued)
4.Future Prospects:
1. The future trajectory of the Canadian travel industry appeared uncertain due to
ongoing challenges like currency depreciation, reduced demand, and fierce
competition.
2. Forecasting the movement of the Canadian dollar remained complex, influenced
by various factors.
5. Decision Dilemma:
•Jacques Dupuis, the owner of VS, faces a critical decision regarding managing the
company's foreign exchange obligations.
•Vendors accept payment only in US dollars, while customers pay in Canadian dollars,
creating a currency exchange risk for VS.
•Dupuis contemplates three options to mitigate foreign exchange risk, each with its
implications.
o purchase US dollars and investing them, potentially offsetting exchange rate losses.

4. Case Snapshot (continued)
6. Options for Mitigating Foreign Exchange Risk:
a. Delaying Currency Exchange until October at the Prevailing Spot Rate:
•Provides flexibility but exposes VS to potential exchange rate fluctuations.
b. Utilizing Forward Contracts to Secure Exchange Rates:
•Allows VS to lock in exchange rates for future transactions, reducing the risk of adverse exchange
rate movements.
c. Borrowing Canadian Dollars to Purchase US Dollars and Investing for Six Months:
•Involves borrowing in Canadian dollars t
•7. Decision Factors:
•Dupuis grapples with balancing risk aversion and potential impact on profitability and customer
pricing.
•Considers the implications of each option on VS's financial stability and competitiveness in the
industry.

5. Q.1 : Given the information in the case, how does the future of the Canadian travel
industry look over the next six months? Over the next year?
Next Six Months:
•The future of the Canadian travel industry over the next six months appears uncertain
due to ongoing challenges such as currency depreciation, reduced demand, and fierce
competition.
•Currency depreciation, particularly the Canadian dollar's decline against the US dollar,
poses a significant challenge for tour operators like Voyages Soleil (VS), as they deal
with transactions in both currencies.
•Reduced demand and heightened competition, exacerbated by the aftermath of events
like 9/11, may continue to impact the industry in the short term.
•Uncertainties in exchange rate dynamics further add to the complexity of forecasting and
planning for the future.

6. Q.1 : Given the information in the case, how does the future of the Canadian travel
industry look over the next six months? Over the next year?
Over the Next Year:
•The outlook for the Canadian travel industry over the next year remains influenced by
ongoing challenges but could also be shaped by broader economic trends.
•Continued currency depreciation, if sustained, could pose long-term challenges for tour
operators like VS, affecting their profitability and competitiveness.
•Economic conditions and geopolitical events will continue to influence exchange rate
dynamics, complicating forecasting and decision-making for businesses operating in the
travel industry.
•Despite these challenges, there may be opportunities for growth and adaptation as the
industry responds to evolving consumer preferences, technological advancements, and
shifts in global travel patterns.

7. Q.2 : Do you expect the value of the Canadian dollar to increase / decrease / not
change over the next six months? Over the next one year?
Next Six Months:
•Given the ongoing challenges faced by the Canadian travel industry, including reduced
demand and currency depreciation, it's plausible to expect that the value of the
Canadian dollar may continue to face downward pressure over the next six months.
•The uncertainties surrounding exchange rate dynamics, influenced by economic
conditions and geopolitical events, suggest that the Canadian dollar may weaken further
against the US dollar in the short term.
•Factors such as the lingering effects of events like 9/11, coupled with intensified
competition and reduced travel demand, could contribute to a depreciation of the
Canadian dollar in the coming months.

8. Q.2 : Do you expect the value of the Canadian dollar to increase / decrease / not
change over the next six months? Over the next one year?
Over the Next Year:
•Looking ahead over the next year, the trajectory of the Canadian dollar remains
uncertain, with potential fluctuations influenced by a range of factors.
•While short-term challenges may persist, broader economic trends and policy
developments could also shape the value of the Canadian dollar over the longer term.
•Factors such as economic recovery efforts, changes in monetary policy, and geopolitical
events will continue to impact exchange rate dynamics and the outlook for the Canadian
dollar.
•Given the complexities involved in forecasting currency movements, it's essential for
businesses like Voyages Soleil to closely monitor economic indicators and geopolitical
developments to assess the potential direction of the Canadian dollar and manage
associated risks effectively.

9. Q.3 : As an advisor to Dupuis, what would you suggest that he do regarding the
foreign exchange risk associated with this contract?
As an advisor to Dupuis, I recommend he mitigates the foreign exchange risk associated with the
US$60 million contract using forward contracts (Option 2). Here's a breakdown of the potential
benefits and considerations:
Benefits of Forward Contracts:
•Locking in a Rate (0.6271): This protects VS from further depreciation of the Canadian dollar.
Let's quantify the potential benefit:
• Worst-Case Scenario (CAD weakens): Suppose the CAD weakens to 0.60 USD/CAD by
October.
• Without hedging: VS would pay 60,000,000 USD * (1 CAD / 0.60 USD/CAD) =
100,000,000 CAD.
• With Forward Contracts: VS would pay 60,000,000 USD * (1 CAD / 0.6271 USD/CAD) =
95.68 CAD million.
• Saving: 100 million CAD - 95.68 million CAD = 4.32 million CAD.
•Predictability: Fixed exchange rate allows for more accurate budgeting and pricing.

10. Q.3 : As an advisor to Dupuis, what would you suggest that he do regarding the
foreign exchange risk associated with this contract?
Considerations:
•Cost of Forward Contracts: There might be a small premium to pay for locking in the rate. However, the
potential savings from a weakening CAD outweigh this cost in the worst-case scenario.
•Missed Opportunity (CAD strengthens): If the CAD strengthens against the USD by October, VS could have
gotten a better exchange rate by waiting. However, the current economic indicators suggest a potential
appreciation of the CAD, but the certainty is low.
Overall, considering the risk-averse nature of VS and the tight margins due to the post-9/11 slump, forward
contracts offer the most secure approach. Locking in a rate of 0.6271 USD/CAD provides a significant financial
buffer (over 4 million CAD) in the worst-case scenario.
Additional Recommendations:
•Monitor Exchange Rates: Dupuis should continue monitoring exchange rates. If the CAD strengthens
significantly before October, VS could potentially renegotiate hotel contracts (although unlikely due to short
notice).
•Customer Pricing: The potential cost of forward contracts can be factored into package pricing. A slight
increase might be necessary, but transparency and highlighting the benefit of exchange rate stability can be
used to justify it, especially considering the competitive landscape.
By implementing forward contracts and closely monitoring the currency market, Dupuis can significantly
mitigate the foreign exchange risk and protect VS's profitability during this challenging economic climate.