Dozier Industries
Dozier Industries

Rupinder Kaur
CCBMDO
Mar23,2011
[Pick the date]

A1
Dozier Industries was a U.S. manufacturer of electronic security systems. In 1986, it received a large order from the United Kingdom, which stipulated payment in British pounds. The company received a deposit, with the balance expected to be paid in 90 days. The contract provided a slim profit margin, which could be easily eliminated by an unfavorable change in exchange rates. The chief financial officer had to decide whether to accept the foreign exchange risk or to hedge the exposure.

A2
i) Given that Dozier industries does nothing to hedge this risk, assuming that spot exchange rate remains the same as on Jan 14,1986 levels,
Total contract amount= £1,175000
Profit =6% of £1,175000
=£ 70500
Exchange Rate as on Jan 14,1986, 1£ =$1.4370
So ,profits =70500*1.4370
=$101308.5
ii)
IF Dozier Industries does nothing, they have no control over whether the project earns a profit or suffers from a loss. Using this strategy Dozier is hoping that the British pound will regain value against the dollar. Their hope is that the British pound will remain close to the spot rate it was bid at so when they receive payment of the original bid they can maintain or maximize profit potential. By following this strategy Dozier is taking the risk that the project works at a loss. Performing a break-even analysis reveals the dollar can appreciate to the British pound to an exchange rate of $1.3893/£ before the project is no longer profitable.

iii) For anything above this rate that is$1.3893/£, the project would be profitable. iv) For any exchange rate below $1.3893/£ ,the project would run into losses.

A3

If Dozier Industries use a forward contract,
Since dozier industries had an outstanding pound receivable, the appropriate hedging transactions would be to sell pounds forward 90 days or to