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Devise a strategy so that the NY Cheese Company can protect itself against

Devise a strategy so that the NY Cheese Company can protect itself against foreign exchange risk.
Sources: 1 Language Style: English (U.S.)
Project description
The Facts
? You work for the NY Cheese Store and you plan to purchase $1,000 worth of cheese in 6
months. You buy all of your cheese from the China Cheese Company in Beijing, China.
? The spot exchange rate (Dollar/Yuan) is currently at $1: ¥6.35.
? The US Government starts to print more money thereby devaluing the dollar. The
exchange rate then becomes $1: ¥5.
? There is talk of additional weakening of the dollar, so you must protect your company
from future currency value fluctuations.
? Assume no inflation, no transportation costs, no tariffs, and no other countries or
The Challenge
Devise a strategy so that the NY Cheese Company can protect itself against foreign
exchange risk.
The Strategy
1. List and explain at least two ways that the NY Cheese Store can hedge its risk.
2. If the NY Cheese Store uses a Futures contract to lock in a rate of $1: ¥4.22, what will be
the effect in one year on their purchase of the $1,000 of cheese as compared to today’s
spot rate?
3. If the actual exchange rate goes to $1: ¥2.33 at the end of six months, and they did indeed
lock in at $1: ¥4.22, what would be the benefit (in dollars) to establishing this contract?

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