International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Palmetto Bug Extermination Corporation (PBEC), a U.S. company, regularly purchases chemicals from a supplier in Switzerland with the invoice price denominated in Swiss francs. PBEC has experienced several foreign exchange losses in the past year due to increases in the U.S. dollar price of the Swiss currency. As a result, Dewey Nukem, PBEC's CEO, has asked you to investigate the possibility of using derivative financial instruments, specifically foreign currency forward contracts and foreign currency options, to hedge the company's exposure to foreign exchange risk.
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Draft a memo to CEO Nukem comparing the advantages and disadvantages of using forward contracts and options to hedge foreign exchange risk. Recommend the type of hedging instrument you believe the company should employ and justify this recommendation.
Ahnuld Corporation, a health juice producer, recently expanded its sales through exports to foreign markets. Earlier this year, the company negotiated the sale of several thousand cases of turnip juice to a retailer in the country of Tcheckia. The customer is unwilling to assume the risk of having to pay in U.S. dollars. Desperate to enter the Tcheckian market, the vice president for international sales agrees to denominate the sale in tchecks, the national currency of Tcheckia. The current exchange rate for 1 tcheck is $2.00. In addition, the customer indicates that it cannot pay until it sells all of the juice. Payment of 100,000 tchecks is scheduled for six months from the date of sale.Fearful that the tcheck might depreciate in value over the next six months, the head of the risk management department at Ahnuld Corporation enters into a forward contract to sell tchecks in six months at a forward rate of $1.80. The forward contract is designated as a fair value hedge of the tcheck…
Magna Steel Erectors, a Canadian manufacturer and exporter of steel components in bridge building has negotiated a deal with BridgeCon Inc., an American bridge construction firm. They have been doing business for several years and have used both Open Account and Letters of Credit. Recently BridgeCon has experienced some challenges in paying on time and maintaining its creditworthiness. Rumours are rampant about the potential for BridgeCon to encounter severe financial difficulty. As a result, Magna is worried about being paid for future shipments. In addition, Magna has recently lost several key engineers and project managers which has severely impacted their ability to perform key work and complete some recent projects on time and to the satisfaction of previous customers. Name and describe two types of Standby Letters of Credit that could address the concerns that Magna has about BridgeCon or that BridgeCon might have about Magna
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