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Dozier Industries A Case Solution
| Solution Id | Length | Case Author | Case Publisher |
|---|---|---|---|
| 2476 | 1466 Words (9 Pages) | Mark Eaker | Darden Business Publishing : UVA-F-0745 |
A Word File
Dozier Industries had to deal with a difficult currency risk that may have resulted in a loss of income if it went worldwide. The Rothschild company's CFO was offered the option of hedging to lessen the possible risk connected with the exchange rate. To mitigate the risk of currency exchange, Dozier Industries has the option of hedging its currency positions. Dozier is now dealing with an influx of 1,175,000 pounds that must be converted into US dollars. This is the present scenario. The money will be handed out in stages, with the first 10% of the pounds already paid in full. After completing the assignment, you'll be able to go on to the next. There will be a decrease in earnings if the value of US dollars or British pounds fluctuates. Hedging and forward hedging are Dozier's two alternatives for reducing currency risk. Hedging options include the call option and put option (Eaker, 1991).
Following questions are answered in this case study solution
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Exactly what is Mr. Rothschild's exposure? If the price of the pound falls from its current price of $1.4480 wills Rothschild win or lose?
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According to Exhibit 5, has Rothschild's profit or loss changed over the last day?
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Based on the most recent information you can find, what is the expected future spot rate for April 14, 1986?
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Of the two hedging techniques, the forward and the spot hedges, which is more profitable? Do they have equivalent risk? What should Richard Rothschild do?
Case Analysis for Dozier Industries A
1. Exactly what is Mr. Rothschild's exposure? If the price of the pound falls from its current price of $1.4480 will Rothschild win or lose?
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Mr. Rothschild's exposure is equivalent to the remaining payment. |
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Mr. Rothschild's exact exposure: |
in ₤ |
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Total contract: |
£1,175,000 |
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Advance received: |
10% |
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Remaining payment: |
10%*(1- 1,175,000) = £1,057,500 |
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Potential loss if price falls |
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Current exchange rate |
$1.4480 |
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Current value of the future payment |
1,057,500*1.4480 = $1,531,260 |
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If the price of the British pound falls, Mr. Rothschild will lose money. |
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For example: |
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New current exchange |
$1.4380 |
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Price fell by $0.01 |
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Current value of the future payment |
1,057,500*1.4380 = $1,520,685 |
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Total loss for every cent |
1,520,685-1,531,260 = -$10,575 |
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Unless the value of the pound goes below $1.4480 per pound, at which point the Rothschild family would suffer a financial loss, the Rothschild family will suffer a financial loss. At the time of writing, one pound is worth $1.4480 US dollars, based on the current exchange rate. The difference in the value of the pound and the dollar means that Mr. Rothschild will have less money in his pocket after the transaction is finished because of the exchange rate. There are a few reasons why the pound might fall in value. One reason is that the British economy is not doing well. If the economy is not doing well, investors will be less likely to invest in the pound, and the value of the pound will go down. Another reason is that the British government might print more money. If the government prints more money, it will be worthless, and the value of the pound will go down. There is also the possibility that the value of the dollar will go up. If the value of the dollar goes up, it will take more pounds to buy a dollar, and the value of the pound will go down. So, if the price of the pound falls from its current price of $1.4480, Mr. Rothschild will lose money.
2. According to Exhibit 5, has Rothschild's profit or loss changed over the last day?
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Opening exchange rate |
$1.4480 |
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Closing exchange rate |
$1.4370 |
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Loss per pound |
1.4370-1.4480 = -$0.0110 |
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Total loss during January 14 alone. |
-$0.0110*1,057,500 = -$11,632 |
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