Question

In: Operations Management

Dealeo Foods Inc. purchases vitamins from a supplier abroad. The invoices received by Dealeo are denominated...

Dealeo Foods Inc. purchases vitamins from a supplier abroad. The invoices received by Dealeo are denominated in the foreign currency. Dealeo understands that fluctuations in foreign currency exchange rates may adversely affect the company’s earnings. The CFO of Dealeo wants you to investigate derivative instruments and determine whether or not the use of a foreign currency forward contract or foreign currency options is best to hedge the company’s exposure to foreign currency exchange risk.

REQUIRED:

Suppose you chosed any country other than the US...

1. Draft a memo to explain to the CFO the advantages and disadvantages of using a foreign currency forward contract and foreign currency options for hedging. Based on the history of the exchange rates, how might these options impact Dealeo?

2. Make a recommendation on the hedging instrument that you believe the company should use. Justify/support your recommendation.

NOTE: Please cite any sources used, FASB Codification and any other sources.

Solutions

Expert Solution

To: CFO, Dealeo

From: Hen Scott

Date: March 18, 2018

Subject: Considerations for hedging

Dear Mac,

As you know, we have been dealing with the invoices of suppliers denominated in foreign currency. That gets administered to the foreign exchange rate fluctuations and can be heavy on the company’s expenditures. I would like to divert your attention to the implementation of currency options for hedging.

Currency option offers the flexibility to the buyer to exchange a particular quantity of a currency for a pre-agreed quantity of another currency at a stipulated date and time.

The advantages of using currency option are:

  • Very cheap to trade
  • Can be availed through exchange
  • Risk exposure is very low for buyer
  • High potential of returns
  • Price movement and volatility can be estimated and strategized

The disadvantages of using currency option are:

  • Risk exposure is high for seller
  • Shelf-life is limited
  • Can become illiquid

So, we can infer that using currency options can be beneficial for our business. Let’s meet to discuss the strategic plan for the implementation of currency options in the business.

Sincerely,

Hen Scott

https://www.berryfx.com/advantages-disadvantages-forward-contracts-currency-options/

https://www.investopedia.com/exam-guide/cfp/characteristics/cfp30.asp

keosha answered 1 month ago
Next > < Previous

Related Solutions

Dealeo Foods Inc. purchases vitamins from a supplier abroad. The invoices received by Dealeo are denominated...
Dealeo Foods Inc. purchases vitamins from a supplier abroad. The invoices received by Dealeo are denominated in the foreign currency. Dealeo understands that fluctuations in foreign currency exchange rates may adversely affect the company’s earnings. The CFO of Dealeo wants you to investigate derivative instruments and determine whether or not the use of a foreign currency forward contract or foreign currency options is best to hedge the company’s exposure to foreign currency exchange risk. REQUIRED: Suppose you chosed any country...
Dealeo Foods Inc. purchases vitamins from a supplier abroad. The invoices received by Dealeo are denominated...
Dealeo Foods Inc. purchases vitamins from a supplier abroad. The invoices received by Dealeo are denominated in the foreign currency. Dealeo understands that fluctuations in foreign currency exchange rates may adversely affect the company’s earnings. The CFO of Dealeo wants you to investigate derivative instruments and determine whether or not the use of a foreign currency forward contract or foreign currency options is best to hedge the company’s exposure to foreign currency exchange risk. REQUIRED: Suppose you chosed any country...
Dealeo Foods Inc. purchases vitamins from a supplier abroad. The invoices received by Dealeo are denominated...
Dealeo Foods Inc. purchases vitamins from a supplier abroad. The invoices received by Dealeo are denominated in the foreign currency. Dealeo understands that fluctuations in foreign currency exchange rates may adversely affect the company’s earnings. The CFO of Dealeo wants you to investigate derivative instruments and determine whether or not the use of a foreign currency forward contract or foreign currency options is best to hedge the company’s exposure to foreign currency exchange risk. REQUIRED: Suppose you chosed any country...
AutoNation Inc purchases $3,500,000 in goods per year from its sole supplier on terms of 5/15...
AutoNation Inc purchases $3,500,000 in goods per year from its sole supplier on terms of 5/15 net 55. If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit (Assume a 365-day year)?
38. A company has daily purchases of $10,000 from its supplier. The supplier offers trade credit...
38. A company has daily purchases of $10,000 from its supplier. The supplier offers trade credit under the following terms: 3/20, net 50 days. The company finally chooses to pay on time (pay in the 50th day) but not to take the discount. We assume 365 days per year. What is the average level of the company’s free trade credit? $30,000 $170,000 $200,000 $300,000 39. Based on the information from Question 38, what is the average level of the company’s...
A company purchases a particular component from an external supplier. The demand for the component is...
A company purchases a particular component from an external supplier. The demand for the component is estimated to be 475 units per month. The cost of placing an order with the supplier is £500. The component can be purchased from the supplier at a price per unit of £63 if so desired. However the supplier also offers a quantity discount such that if the company orders 800 or more in each order the price per unit is only £60. The...
Applehead Technology is a company that purchases a device called the EyePod from a supplier and...
Applehead Technology is a company that purchases a device called the EyePod from a supplier and then sells the devices to retail customers. If the company makes no changes in its operations, the company expects the following for the coming year. # of units sold                                                              30,000 Price                                                                           $300 per unit Cost of merchandise                                                 $100 per unit                        Rent and Salaries for the year                                 $1,300,000 The company is holding a meeting to discuss ways to increase its profit...
You received invoices from Cisco Industries dated May 8th for $1,500, May 19th for $4,000, and...
You received invoices from Cisco Industries dated May 8th for $1,500, May 19th for $4,000, and June 1st for $2,500. You have also made payments of $1,200 on May 27th and $1,800 on May 30th. What total amount must be paid on June 5 th to settle the remaining balance on all the invoices with terms 2/10, n/30? Please can I get a clear and easy solution so I can understand thank:)
A distributor of computer parts purchases a specific component from a supplier in lots of 1000...
A distributor of computer parts purchases a specific component from a supplier in lots of 1000 units. The cost of purchasing a lot is $30,000. The supplier is known to supply imperfect lots. In other words, a lot received by the distributor may contain defective units. Historical data suggest that the proportion of defective units in a lot supplied by this supplier follows the following probability distribution: Proportion of defective units in a lot Probability 0.05 0.50 0.10 0.25 0.25...
A retailer purchases a certain type of chemical from a supplier on the following quantity discount...
A retailer purchases a certain type of chemical from a supplier on the following quantity discount schedule: • If the order amount is less than 100 kg.s, the supplier charges $30 per kg. • If the order amount is at least 100 kg.s and less than 500 kg.s, the supplier applies an incremental discount where the first 100 kg. costs $30 per kg. and the remaining amount costs $28 per kg. • If the order amount is at least 500...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT