Tennessee Co. conducts business in the U.S. and Canada. The net cash flows from Canadian operations are expected to be C$500,000 next year. The Canadian dollar is valued at about $.90. The net cash flows from U.S. operations are supposed to be $200,000. To reduce sensitivity of its net cash flows without reducing its volume of business in Canada, Tennessee Co. could:

Question

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By purchasing Canadian supplies, Tennessee Co. can use the Canadian dollars it earns to pay for expenses, which reduces its exposure to exchange rate fluctuations. This also helps to support the Canadian economy and potentially strengthens relationships with Canadian business partners. Increasing U.S. borrowings does not address the issue of exchange rate sensitivity and could lead to increased interest expense. Decreasing prices on Canadian goods could potentially reduce revenue and profitability, while decreasing borrowed funds in Canada could limit the company's ability to conduct operations in the country.