1. Could SMS Elotherm have taken steps to avoid the position in which it eventually found itself? What are those steps? Why do you think the company did not take these steps?

2. Why was Keiper weathering the rise of the euro better than SMS?

3. In retrospect, what might Keiper have done differently to improve the value of its real hedge against a rise in the value of the euro?

Udo Pfeiffer, the CEO of SMS Elotherm, a German manufacturer of machine tools to engineer crankshafts for cars, signed a deal in late November 2004, to supply the U.S. operations of DaimlerChrysler with $1.5 million worth of machines. The machines would be manufactured in Germany and exported to the United States. When the deal was signed, Pfeiffer calculated that at the agreed price, the machines would yield a profit of €30,000 each. Within three days that profit had declined by €8,000! The dollar had slid precipitously against the euro. SMS would be paid in dollars by DaimlerChrysler, but when translated back into euros, the price had declined. Since the company’s costs were in euros, the declining revenues when expressed in euros were squeezing profit margins.