Dozier Industries
Dozier Industries Case
On January 13, 1986 Dozier Industries, an American based firm, received notice that a bid on a project in the United Kingdom had been accepted. The project was to bring in £1,175,000 in revenue. Therefore, the revenue received for this project will need to be transferred into US dollars. When Dozier issued the bid on December 3, 1985 the project the exchange rate was $1.4820/£. This rate would have provided Dozier with the desired 6% profit on the project. On January 13, the day the bid was accepted, the exchange rate had changed to $1.4480/£. On January 14 the rate had change again to $1.4370/£. This inflation in the dollar to the British pound has severe implications for the profit potential on this project. Dozier currently has four different alternatives they can choose to do; they can do nothing, use a forward contract, use a money market hedge, or buy options.
Do Nothing
If Dozier Industries elects to do nothing they have no control over whether the project earns a profit or suffers from a loss. Using this strategy Dozier is hoping that the British pound will regain value against the dollar. Their hope is that the British pound will remain close to the spot rate it was bid at so when they receive payment of the original bid they can maintain or maximize profit potential. By following this strategy Dozier is taking the risk that the project works at a loss. Performing a break-even analysis reveals the dollar can appreciate to the British pound to an exchange rate of $1.3893/£ before the project is no longer profitable.
Forward Contract
If Dozier wishes to ensure that they will make a profit, removing risk of loss, then they can enter into a 90 day forward contract to sell British pounds at the forward rate of $1.4198/£. This method will provide a total profit of 1.96%. The profit is calculated by adding the total receivable at the forward rate and the future value of the 10% deposit on the contract received
On January 13, 1986 Dozier Industries, an American based firm, received notice that a bid on a project in the United Kingdom had been accepted. The project was to bring in £1,175,000 in revenue. Therefore, the revenue received for this project will need to be transferred into US dollars. When Dozier issued the bid on December 3, 1985 the project the exchange rate was $1.4820/£. This rate would have provided Dozier with the desired 6% profit on the project. On January 13, the day the bid was accepted, the exchange rate had changed to $1.4480/£. On January 14 the rate had change again to $1.4370/£. This inflation in the dollar to the British pound has severe implications for the profit potential on this project. Dozier currently has four different alternatives they can choose to do; they can do nothing, use a forward contract, use a money market hedge, or buy options.
Do Nothing
If Dozier Industries elects to do nothing they have no control over whether the project earns a profit or suffers from a loss. Using this strategy Dozier is hoping that the British pound will regain value against the dollar. Their hope is that the British pound will remain close to the spot rate it was bid at so when they receive payment of the original bid they can maintain or maximize profit potential. By following this strategy Dozier is taking the risk that the project works at a loss. Performing a break-even analysis reveals the dollar can appreciate to the British pound to an exchange rate of $1.3893/£ before the project is no longer profitable.
Forward Contract
If Dozier wishes to ensure that they will make a profit, removing risk of loss, then they can enter into a 90 day forward contract to sell British pounds at the forward rate of $1.4198/£. This method will provide a total profit of 1.96%. The profit is calculated by adding the total receivable at the forward rate and the future value of the 10% deposit on the contract received