Too Many Derivatives from Which to choose?

550 Words

Too Many Derivatives from Which to Choose?

 

A bookseller has long done business only within the United States. Recently its managers have decided to branch out. The company now has branches in Southeast Asia, the Middle East, and South America.

A consequence is that the firm is now exposed to foreign exchange risks. It does business with two banks, which offer to provide hedging services for the firm using currency futures contacts and options contracts. Both banks, however, have just announced significant increases in their fees for providing these services.

For this reason, the company’s upper management is contemplating limiting their hedging actives to only one of the two currently used hedging methods.

1.   
What issues do this firm’s managers face as they consider the choice between options and futures?

2.   
Under what circumstances would one hedge with options? Under what circumstances would one hedge with futures? What are the advantages and disadvantages of each hedging alternative?

3.   
Since the firm is using hedging to manage exchange rate risk, should the firm manage the hedging in-house, or should the firm agree to the higher fees and have the banks continue to manage the hedging activities?

 

Case Studies follow the following general format:

 

•An Introduction where you explain the situation and the decision(s) facing the firm. Most, if not all, of this information will be in the case.

•Alternatives: here you define terms as needed and identify the alternative available to the firm.

•Evaluate the alternatives: discuss the advantages and disadvantages of each of the relevant alternatives.

 

•Recommendation and conclusion: select one of the alternatives as your recommendation.  Support your recommendation with information used in your case analysis. 

Provide specific and detailed recommendations.

 

•Use additional resources as needed, but remember to cite and reference them properly using APA style.

550

Words

Too Many Derivatives from Which to Choose

?

A bookseller has long done business only within t

he

United States. Recently its

managers have decided to branch out. The

company now has branches in

Southeast Asia, the Middle East, and South America.

A consequence is that the firm is now exposed to foreign exchange risks. It does

business with two banks, which offer to provide hedging services for the firm

using currency fu

tures contacts and options contracts. Both banks, however,

have just announced significant increases in their fees for providing these

services.

For this reason, the company’s upper management is contemplating limiting

their hedging

actives

to only one of

the two currently used hedging methods.

1.

What issues do this firm’s managers face as they consider the

choice between options and futures

?

2.

Under what circumstances would one hedge with options? Under

what circumstances would one hedge with futures? What a

re the

advantages and disadvantages of each hedging alternative?

3.

Since the firm is using hedging to manage exchange rate risk,

should the firm manage the hedging in

–

house, or should the firm

agree to the higher fees and have the banks continue to manage t

he

hedging activities?

Case Studies follow the following general format:

•

An

Introduction

where you explain the situation and the decision(s) facing the

firm. Most, if not all, of this information will be in the case.

•

Alternatives

: here you define ter

ms as needed and identify the alternative

available to the firm.

•

Evaluate the alternatives

: discuss the advantages and disadvantages of each of

the relevant alternatives.

•Recommendation and conclusion: select one of the alternatives as your recommendation.  Support your recommendation with information used in your case analysis. 

Provide specific and detailed recommendations.

•Use additional resources as needed, but remember to cite and reference them properly using APA style.

550 Words

Too Many Derivatives from Which to Choose?

A bookseller has long done business only within the United States. Recently its
managers have decided to branch out. The
company now has branches in
Southeast Asia, the Middle East, and South America.

A consequence is that the firm is now exposed to foreign exchange risks. It does
business with two banks, which offer to provide hedging services for the firm
using currency fu
tures contacts and options contracts. Both banks, however,
have just announced significant increases in their fees for providing these
services.

For this reason, the company’s upper management is contemplating limiting
their hedging
actives

to only one of

the two currently used hedging methods.

1.

What issues do this firm’s managers face as they consider the
choice between options and futures
?

2.

Under what circumstances would one hedge with options? Under
what circumstances would one hedge with futures? What a
re the
advantages and disadvantages of each hedging alternative?

3.

Since the firm is using hedging to manage exchange rate risk,
should the firm manage the hedging in
–
house, or should the firm
agree to the higher fees and have the banks continue to manage t
he
hedging activities?

Case Studies follow the following general format:

•An
Introduction

where you explain the situation and the decision(s) facing the
firm. Most, if not all, of this information will be in the case.

•
Alternatives
: here you define ter
ms as needed and identify the alternative
available to the firm.

•
Evaluate the alternatives
: discuss the advantages and disadvantages of each of
the relevant alternatives.