Dozier Industires Strategy Paper

Finance 423

Professor Haddad

Dozier Industries: Strategy Paper

Before the case, Dozier Industries had done the bulk of their business within the boundaries of the United States; they were not very familiar with running business internationally. After deciding to expand into foreign markets, they wanted to look at hedging their currency risk. After their contract with the United Kingdom their exposure to currency risk also meant that their profit margin from doing business abroad was threatened as well. With this exposure to risk, Dozier had to decide whether or not to secure their profits by acting in the foreign exchange market. Due to the depreciating value of the pound to the US dollar it left Dozier susceptible to this depreciation. With this vulnerability there was also the strengthening sterling that would help increase profits for the company.

In the first case, Dozier Industries could invest in a forward contract, a spot transaction, or do nothing at all. The first two options would have to deal with the forward rates in 3 months. It would be best to compare them to these rates as it makes for the best chance of deciding how to invest in the foreign exchange market. Doing nothing wouldn’t be the best option as they lose the chance at increasing their profits through the forward contract or the spot transaction. By hedging Dozier could guarantee their profits regardless of the depreciation of the pound. With the 90-day contract that had been made, they could sell pounds at a three-month forward rate. This would secure that they get paid for the amount of the forward rate at the expiration of the contract as opposed to the exchange rates depreciating and getting paid less than expected in US dollars. For the spot transaction, Dozier could borrow pounds and exchange them into dollars at the current rate. After getting paid the rest of the contract, they could use them to the repay the borrowed pounds.

Mr. Rothschild wanted to be able to gain with...