Alpha and Omega are U.S. corporations. Alpha has a plant in Hamburg that imports components from the United States assembles them, and then sells the finished product in Germany.

Alpha and Omega are U.S. corporations. Alpha has a plant in Hamburg that imports components from the United States assembles them, and then sells the finished product in Germany. Omega is at the opposite extreme. It also has a plant in Hamburg, but it buys its raw material in Germany and exports its output back to the United States. How is each firm likely to be affected by a fall in the value of the euro? How could each firm hedge itself against exchange risk?

Solutions

Expert Solution

Alpha has revenues in euros and expenses in dollars. If the value of the euro falls, its profit will decrease. In the short run, Alpha could hedge this exchange risk by entering into a forward contract to sell euros for dollars.

Omega has revenues in dollars and expenses in euros. If the value of the euro falls, its profit will increase. In the short run, Omega could hedge this exchange risk by entering into a forward contract to sell dollars for euros.

jeff jeffy answered 2 years ago

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