Your firm, Cheesis Fin Inc., is a British manufacturer of fine Stilton cheese. You believe you can sell your product effectively in France. You have recently
agreed to sell a large container of cheese for 40,000 euros in six months’ time. The spot rate of exchange between euros and pounds is 1.6 euros/pound. The
forward rate for a transaction in six months is 1.55 euros/pound.
Discuss the following questions/statements:
1. Explain how you might establish a forward contract to mitigate your transaction exposure in this instance. What will be your expected future cash flow in
pounds?
2. If you expect the future spot rate in six months to be 1.5 euros/pound, will this influence your decision?
3. Suppose you decide to undertake the forward transaction, what happens if in four months you learn that your cheese has spoiled, and you cannot deliver
on your promised side of the transaction?
4. Why international trade is more difficult and riskier from the exporter’s perspective than is domestic trade.
5. Do you think that a country’s government should assist private business in the conduct of international trade through direct loans, loan guarantees, and/or
credit insurance?
Reading Requirement:
Fabozzi, F. J. & Peterson Drake, P. (2009). Finance: Capital Markets, Financial Management, and Investment Management. New Jersey: Wiley. Retrieved from
EBSCO eBooks in the Touro Library. (See Chapter below).
• Chapter 16: Financial Risk Management
Video Links
• Introduction to Foreign Exchange Markets: https://www.youtube.com/watch?v=UnVIEX1P2IE
• Currency Risk (An explanation of currency risk): https://www.youtube.com/watch?v=94XJJCINMuU
• Risk factors in a forward foreign currency contract: https://www.youtube.com/watch?v=OUEknl19WcU
• International cost of capital: https://www.youtube.com/watch?v=fD_hhR-GHO0