Foreign Exchange Problem Teaser

The Problem

A company imports from abroad and does not have to pay for the goods until they are sold on. Payments must be made in the currency of the supplier.  The problem with this is that the exchange rate at the time the goods have to be paid for is a future unknown.

If the company imports $2 million worth of goods, then there is a risk of the exchange rate falling and having to pay a higher price than  now.  Every 10 cent change in the rate could cost the company some £83,000.


The rate could, of course, go the other way.  The company might be happy to just let this risk run, confident that they can pass on the price increase, or perhaps judging that the dollar is weakening and sterling strengthening, so that on balance they are more likely to benefit from movements. Many , however, prefer a degree of certainty.  How can they achieve certainty when they cannot know what exchange rates will be ?

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