Foreign Currency Hedging Case Study: Jacques Couture, Inc.

Prof. Ronald Richter¹, Prof. Arthur S. Guarino², & Joshua Schupak³¹MBA, Department of Finance and Economics, Rutgers University, New Jersey, US.
² MBA, MSSc, JD, Department of Finance and Economics, Rutgers University, New Jersey, US.
³Undergraduate Finance Student, Department of Finance and Economics, Rutgers University, New Jersey, US
DOI – http://doi.org/10.37502/IJSMR.2021.4804

Abstract

This case study deals with a clothing manufacturing firm that must deal with foreign currency exchange and hedging. The firm’s chief financial officer must evaluate the foreign exchange transaction exposure since the company sells its products in foreign markets and has foreign currency exposure that affects earnings. The firm must set its prices to customers before the product is sent to its retail customers overseas. The firm must contend with a long lead time, one year to 18 months, before the retail customer commits to purchasing the merchandise. The firm not only contends with foreign currency exchange risk when selling its products overseas, but must also purchase fabric and other materials in currencies other than U.S. dollars. The firm sells its products globally and, therefore, is very often using different currencies with various retail customers and suppliers. The firm seeks to limit its exposure to foreign currency transaction risk, while lowering its variability of costs and sustaining its profitability. The chief financial officer must make an accurate forecast for the next twelve months of the foreign exchange transaction exposure and determine how to hedge that risk. The chief financial officer also has the task of not allowing net profits to decrease due to currency movements even if revenues are increasing.

Keywords: Active hedging, FASB 52, Hedging, Natural hedging.

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