Forward Hedging Wedco Technology of New Jersey exports plastics products to Europe. Wedco decided to price its exports in dollars. Telematics International, Inc. (of Florida), exports computer network systems to the United Kingdom (denominated in British pounds) and other countries. Telematics decided to use hedging techniques such as forward contracts to hedge its exposure. Does Wedco’s strategy of pricing its materials for European customers in dollars avoid economic exposure? Explain. Explain why the earnings of Telematics were affected by changes in the value of the pound. Why might this firm sometimes leave its exposure unhedged?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 11, Problem 28QA
Textbook Problem

Forward Hedging Wedco Technology of New Jersey exports plastics products to Europe. Wedco decided to price its exports in dollars. Telematics International, Inc. (of Florida), exports computer network systems to the United Kingdom (denominated in British pounds) and other countries. Telematics decided to use hedging techniques such as forward contracts to hedge its exposure.

  1. Does Wedco’s strategy of pricing its materials for European customers in dollars avoid economic exposure? Explain.
  2. Explain why the earnings of Telematics were affected by changes in the value of the pound. Why might this firm sometimes leave its exposure unhedged?

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