F. Mayer Imports Pty. Ltd. is an Australian firm that specialized in importing European food products to distribute them in Australia. As the company dealt with high-quality products, it was not a surprise that annual product procurement amounted to approximately €70 million (Wallace 1). By 2014, the company distributed over 1,000 products daily to serve restaurants, wholesalers, supermarkets, hotels, and others (Wallace 1). Specific problems appeared when the Australian dollar (AUD) started losing its strength against the euro (EUR). Currently, the AUD to EUR exchange rate is 0.6900, which means that particular actions should be taken to protect profit margins (Wallace 1). Stephen Goode is a chief financial officer of F. Mayer, and he has to choose whether it is necessary to hedge and, if so, which hedging strategy to apply.
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At first, F. Mayer used vanilla forward contracts to manage euro exchange risks. However, that hedging strategy failed to be successful because there was no formal policy that could decide on when and how to hedge. Consequently, all the decisions were made by Goode and the business owner without a system. Thus, they need to find and use a specific hedging strategy if they decide to manage their risks. Firstly, one should mention that F. Mayer should consider hedging opportunities since it will reduce risks and protect the company against further currency fluctuations. Apart from vanilla forward contracts, there are a few more options, including foreign exchange swaps, non-deliverable forwards, and structured options. Even though each of them has some potential of introducing some positive results, foreign exchange swaps seem to be the most suitable here. It refers to the fact that this derivative stands for an agreement to exchange one currency for another at a stipulated exchange rate to protect funds against unfavorable market fluctuations (Subacevschi 745). It is what F. Mayer needs to manage possible risks.
Wallace, Fan. F. Mayer Imports: Hedging Foreign Currency Risk. Ivey Publishing, 2017.
Subacevschi, Mihaela. “Foreign Currency Risk Hedging.” Challenges of the Knowledge Society. Economics, 2017, pp. 742-746.