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Example of Foreign Exchange Risk

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1. You're the treasurer of Warm Wear Inc., which imports wool sweaters from around the world. Kreploc, a company in the country of Slobodia, has a product your marketing department would like to carry and doesn't require payment until 90 days after delivery. Unfortunately, the Slobodian blivit tends to vary in value by as much as 30% over periods as short as three months. This makes you reluctant to do business with Kreploc because of exchange rate risk. The marketing department can't understand why you have any concerns at all. Prepare a brief explanation, including an illustration, of why you're concerned.

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Solution Summary

This solution explain using a brief illustration of foreign exchange risk if that risk cannot be effectively hedged.

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In 250 to 350 words, discuss foreign exchange risk and give an example that analyzes how foreign exchange rates could cause a loss to the firm.

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