XYZ Co., a U.S. maker of specialty chemicals, exports 40% of its $600 million in annual sales:
Question:
XYZ Co., a U.S. maker of specialty chemicals, exports 40% of its $600 million in annual sales: 5% to Canada and 7% each to Japan, Britain, Germany, France, and Italy. It incurs all its costs in U.S. dollars, while most of its export sales are priced in the local currency.
(a) How is XYZ Co. affected by exchange rate changes?
(b) Discuss whether or not XYZ Co. has translation exposure.
(c) Distinguish between XYZ Co.'s transaction exposure and its operating exposure.
(d) How can XYZ Co. protect itself against transaction exposure?
(e) What financial, marketing, and production techniques can XYZ Co. use to protect itself against operating exposure?
(f) Starting next year, XYZ Co. will be obtaining some of its raw materials from China and would need delivery of RMB13,000,000 worth of materials. However, the Chinese supplier can only guarantee RMB10,000,000 worth of goods with the remainder being supplied subject to availability. How should XYZ Co. use the derivatives markets to best hedge the risk from this upcoming transaction?