Chapter 12, Problem 7QA

A U.S. company purchases inventory from a foreign vendor, and purchases are denominated in the foreign currency (FC). The U.S. dollar is expected to weaken against the FC. Explain how a forward contract might be employed as a hedge against exchange rate risk.

Sooner Co. is a U.S. wholesale company that imports expensive high-quality luggage and sells it to retail stores around the United States. Its main competitors also import high-quality luggage and sell it to retail stores. None of these competitors hedge their exposure to exchange rate movements. Why might Sooner’s market share be more volatile over time if it hedges its exposure?