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 offset its Canadian dollar cash flows with Canadian dollar expenses, thus reducing its exposure to currency fluctuations. Additionally, buying supplies locally can also lower transportation costs and increase efficiency. Increasing borrowings in the U.S. (B) would not necessarily reduce sensitivity to foreign exchange risk, and decreasing borrowed funds in Canada (D) would not be a feasible option if the company needs those funds to conduct business in Canada. Decreasing prices on Canadian goods (C) may increase sales but would not necessarily mitigate foreign exchange risk.