FIN 423 SDSU Dozier Industries Foreign Exchange Risk and Hedging Case Study

Question Description

I’m working on a accounting case study and need an explanation to help me study.

Hi, I am taking Fin-423, the case has two parts Dozier Industries (A) and (B). I am doing a case analysis for Dozier Industries part (B). There are 4 people in my group that will present the case. I am going to do part (B) questions #3 and #4. The professor is very strict about where each number comes from, so please explain where each number and formula come from, from what section in the book, and what paragraph. Both Dozier Industries (A) and (B) are related so please read both. The case and the presentation are going to rely on an Excel sheet and calculation, but also PowerPoint. My English is a second language so please use simple words for me. Please send me a draft when you do it so I can show it to my group to make sure I am on the right track.

I have attached the case book below. The case will start on page 177.

Thank you so much!

Dozier Industries (A)

1. Exactly what is Mr. Rothschild’s exposure? If the price of the pound falls from its current price of $1.4480, will Rothschild win or lose?

2. According to Exhibit 5, has Rothschild’s profit or loss changed over the last day?

3. Based on the most recent information you can find, what is the expected future spot rate for April 14, 1986?

4. Of the two hedging techniques, the forward and the spot hedges, which is more profitable? Do they have equivalent risk?

5. What should Richard Rothschild do?

Dozier Industries (B)

1. If Mr. Rothschild elects to use an option hedge, exactly how should he do it? Should he buy a call, buy a put, sell a call or sell a put?

2. Which option or options from Exhibit 2 would you use? Why?

3. How is the option hedge better or worse using a forward contract? Which hedging technique should Mr. Rothschild use?

4. Looking back on his situation on December 3, 1985, should Mr. Rothschild have used a forward hedge at that time? An option hedge?

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