Introduction
Dozier firm is a US based company but with a wide network in the UK in installing security systems. In January 13, 1986 Dozier had accepted a contract in the UK to install internal security system in one of the largest UK manufacturing company. This bid was of international sales type as all the material and labor were to be paid in US dollar, however, the price of this project was decided in the GBP an amount of GBP 1.175 Million. Dozier has already received 10% cash of the initial amount and the remaining amount will be received after the completion of contract which is due to be completed in three month.
dozier industries b case solution
PROBLEM STATEMENT
The exchange rate between the USD and GBP is currently USD 1.4820/GBP while Dozier is about to receive 90% of its contract amount after three month. As Dozier’s functional currency is USD, therefore, all the costing of the project is performed in USD. Hence, the risk of USD/GBP exchange rate will lay for the period of three months till Dozier receives the remaining amount of contract bid which is 90% of bid value. It is estimated if this currency exchange related to contract is not hedged then the whole contract will turn into loss due to exchange rate loss and Dozier will earn nothing on this project.
Alternative to hedge currency risk
FORWARD CONTRACT
Another option available to Dozier is to use the forward rate contract. Forward rate contract is OTC over the counter, it mostly offered by the bank and it is not standardized and it is also not liquid as future contacts. If Dozier can hedge currency exchange risk by dealing in GBP or by buying USD, then the management of the company could enter into a 90 days forward contract to sell British pounds. The three month forward pounds rate is USD 1.4198/GBP while current spot rate is USD1.4370 /GBP. The profit will be calculated if forward rate is used as hedging technique, then the profit would be calculated around 1.7%. The details of profits calculation are shown in the appendix. This amount will then be reinvested in US dollars at the spot rate of that date.
MONEY MARKET HEDGE
The third option available to Dozier is to use the money market hedge. Under this hedging method the remaining balances of GBP1.0575 will be borrowed at 1.5% above UK prime rate/ In the UK prime lending rate is 13.50% and Dozier industries can borrow at the rate of 15% (13.50%+1.50), therefore, GBP 1.0575 will be converted into USD at current spot rate which is $1.43270/GBP. An amount of $1.519 million will then be deposited at United States at an annual rate of 9.50% for 3 months. By using money market hedge, Dozier will earn interest on its borrowed amount and then the amount will be repaid to the bank after three months once it is received after completion of contact. Under this method, the company could make a profit of 1.73%......................
This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.
Dozier Industries was an American manufacturer of electronic security systems. In 1994, he received a large order from the United Kingdom, which provides for the payment in GBP. The company has received the deposit, with the balance expected to be paid within 90 days. The contract provided for thin profits, which can be easily removed unfavorable changes in exchange rates. Chief financial officer, had to decide whether to accept the currency risk or to hedge exposure. "Hide
by Bruce McKern Source: Stanford Graduate School of Business 8 pages. Publication Date: April 8, 2002. Prod. #: F163-PDF-ENG
Related Case Solutions & Analyses:
Fritidsresor Under Pressure (C): After the Tsunami
Platform-Mediated Networks: Definitions and Core Concepts
Note on Individual and Corporate Liability
John Smithers at Sigtek
New York City Against AIDS Video
Merck & Co. Inc. (A)
AMB Property Corporation: Navigating Treacherous Waters
ALLIANCE DESIGN CONCEPTS FOREIGN EXCHANGE RISK
Brazos Partners and the Tri-Northern Exit
EVOLUTION
