Business and Management

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 forward contracts or currency swaps. 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 branching out within the world of derivatives just as it has done in global bookselling. Now officers of the company are considering using currency futures or options to supplement bank-provided forward contracts and swaps.

What issues do this firm’s managers face as they consider these alternatives? Focus on options and futures in your analysis.

What should one consider when deciding whether to hedge?
If one decides to hedge, when would one manage the hedging in-house, and when would one agree to the higher fees to have the bank manage the hedging?
Under what circumstances would one hedge with options? Under what circumstances would one hedge with futures?

Your case should have an:

INTRODUCTION that states a thesis or point that you are making,

a BODY that explains each point and gives examples,

and a CONCLUSION that sums up the case and restates the thesis.

Be sure to include APA formatted citations and references to any source that you base your work on.

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