Your firm has just landed a large client contract in Germany and secured an even

Question

Your firm has just landed a large client contract in Germany and secured an even larger supplier contract from Mexico. You are in the automobile stereo sound system business with the Detroit Auto Show, your signature event (product, advertising, etc.), and a potential deal with the Chinese and Brazilians projected to be signed and sourced in March and July 2016, respectively. What do you recommend your C-Suite consider and your risk management group do, if anything, about this increasingly international exposure? What financial instruments, if any, would be of help to your firm? Why is your firm even having this discussion?

Explanation / Answer

Here company is engage in automobile stereo sound system business and deals with customers and suppliers which are not from the same country, Hence company faces risk of foreign currency exposure. On client side it faces risk of foreign currecy being appreciated and on supplier side it faces risk of foreign currence being depreciated. If this happens than the profitability of business can be affected

To mitigate the risk the company can use derivative products such as forward contract, option contracts etc. Forward contract obliges buyer of contract to buy or sell particular currency at specified time. In case of client we can buy forward contract on foreign currency and in case of supplier we can sell the same.

Thus for reducing foreign currency risk such discussions are necessary

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