Dealeo Foods Inc. purchases vitamins from a supplier abroad. The invoices received by Dealeo are denominated in the foreign currency. Dealeo understands that fluctuations in foreign currency exchange rates may adversely affect the company’s earnings. The CFO of Dealeo wants you to investigate derivative instruments and determine whether or not the use of a foreign currency forward contract or foreign currency options is best to hedge the company’s exposure to foreign currency exchange risk.
REQUIRED:
Suppose you chosed any country other than the US...
1. Draft a memo to explain to the CFO the advantages and disadvantages of using a foreign currency forward contract and foreign currency options for hedging. Based on the history of the exchange rates, how might these options impact Dealeo?
2. Make a recommendation on the hedging instrument that you believe the company should use. Justify/support your recommendation.
The MEMO should contain these parts:
Subject: An appropriate subject for the memo. It is brief, but informative
Issue
In this section clearly define the issue that will be addressed. This may be stated in the form of a question or two. This should be succinctly stated (in your own words).
Conclusion
This is typically written last. In a few sentences, explain the solution to the issue.
Example: The company should select XXX, which is consistent with XXXX. This may result in or yield XXX.
Analysis
In this section discuss the alternatives and the related pros and cons of each. This section only discusses facts; it does not explain which is best. This section should include authoritative support that helps explain the similarities/differences among the alternatives and the potential impact of the alternatives.
Discussion
Which alternative is best and why?
Based on the analysis, this section explains which alternative is selected. This section supports the Conclusion.
NOTE: Please cite any sources used, FASB Codification and any other sources.