The protectedpdf technology is Copyright 2006 Vitrium Systems Inc. All Rights Reserved. Patents Pending.

UVA-F-0746
Dozier Industries (B)
TO ACCESS THIS DOCUMENT
This is a protected document. The first two pages are available for everyone to see, but only
faculty members who have verified faculty status with Darden Business Publishing are able to view
this entire inspection copy.
VERIFIED FACULTY
If you have verified faculty status with Darden Business Publishing, simply enter the same
username that you use on the Darden Business Publishing Web site, and then click Submit.
Please note that this is an inspection copy and is not for classroom use.
UNVERIFIED FACULTY
If you are teaching faculty and do not yet have verified faculty access with Darden Business
Publishing, please click on the Faculty Register link and submit your information requesting
verified faculty access.
OTHER USERS
If you would like to read the full document, click on Buy Case Now to be redirected to the Darden
Business Publishing Web site where you can purchase this and other Darden cases.
If you have any questions or need technical help, please contact Darden Business
Publishing at 1-800-246-3367 or email sales@dardenbusinesspublishing.com
Username:
Document Id 0000-1402-58EE-00005967
Submit
Faculty Register
Buy Case Now
SSRN Inspection
UVA-F-0746


This case was prepared by Leslie Zanetti under the supervision of Professor Mark R. Eaker. It was written as a basis for
class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 1987
by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send
an e-mail to sales@dardenpublishing.com. No part of this publication may be reproduced, stored in a retrieval system,
used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or
otherwisewithout the permission of the Darden School Foundation.





DOZIER INDUSTRIES (B)


Richard Rothschild, the chief financial officer of Dozier Industries, was still contemplating
how best to manage the exchange risk related to the companys new sales contract. The 1,057,500
balance of the contract was due in three months on April 14, 1986, creating a long position in British
pounds. Rothschild had spoken previously to J ohn Gunn, an officer in the International Division of
Southeastern National Bank, about hedging his long pound exposure. Gunn had explained two
alternatives available to Dozier to reduce the exchange risk: a forward contract or a spot transaction.
Either transaction would ensure that Dozier receive a set dollar value for its pound receivable,
regardless of any change in the value of the pound. Given his previous analysis of the foreign
exchange market, Rothschild was concerned that both of these hedging alternatives would lock in a
profit margin below the 6% he had originally anticipated for the contract. He wondered if there were
some way to get the upside potential without all the risk.

The pound had weakened since his bid submission date on December 3 (see Exhibit 1), but
he was not entirely convinced it would continue to fall, or at least not as much as the forward rate
indicated. If the future spot rate were greater than the current forward rate, an unhedged position
could lead to a gain, whereas a hedged position would create an opportunity lost. Rothschild
wondered if other alternatives were available, and he again called J ohn Gunn at the bank for advice.

Gunn explained that Rothschild could also use currency options to hedge against his
uncertain foreign exchange exposure. Options provide a means of hedging against volatility without
taking a position on expected future rates. Gunn explained that there are two basic varieties of
options contracts: puts and calls. A put gives the holder the right, but not the obligation, to sell
foreign currency at a set exercise or strike price within a specified time period. A call gives the
holder the right to buy foreign currency at a set price. In comparison with a forward or futures
contract, the holder of an option does not have to transact at the agreed-upon price, but has the
choice or option to do so. Gunn told Rothschild that options are complicated and increase the front
end cost of hedging in comparison with a forward hedge. He said Rothschild could find the
prevailing option contract prices in the Wall Street Journal (see Exhibit 2).


-2- UVA-F-0746

It appeared to Rothschild that options contracts might provide some benefit. He wondered if
options contracts were the best alternative for Dozier right now. He also wondered whether he could
have used options contracts when preparing his bid.

-3- UVA-F-0746

Exhibit 1
DOZIER INDUSTRIES (B)
Historical Spot and Forward Pound Rates in U.S. Dollars


3-month
Date Spot Forward Rate

7/9/85 1.3640 1.3490
7/16 1.3880 1.3744
7/23 1.4090 1.3963
7/30 1.4170 1.4067
8/6 1.3405 1.3296
8/13 1.3940 1.3828
8/20 1.3900 1.3784
8/27 1.3940 1.3817
9/4 1.3665 1.3553
9/10 1.3065 1.2960
9/17 1.3330 1.3226
9/24 1.4200 1.4089
10/1 1.4120 1.4005
10/8 1.4155 1.4039
10/15 1.4120 1.4007
10/22 1.4290 1.4171
10/29 1.4390 1.4270
11/5 1.4315 1.4194
11/12 1.4158 1.4037
11/19 1.4320 1.4200
11/26 1.4750 1.4628
12/3 1.4820 1.4704
12/10 1.4338 1.4214
12/17 1.4380 1.4249
12/23 1.4245 1.4114
12/30 1.4390 1.4260
1/7/86 1.4420 1.4284
1/14/86 1.4370 1.4198



Source: Chicago Mercantile Exchange Statistical Yearbook.

-4- UVA-F-0746

Exhibit 2
DOZIER INDUSTRIES (B)
Foreign Currency Options on J anuary 14, 1986


Options & Strike
Underlying Price Calls-Last Puts-Last

J an. Feb. Mar. J an. Feb. Mar.

12,500 British Pounds - cents per unit
B Pound 130 s r 13.50 s r r
144.41 135 s r 9.20 s 0.20 0.50
144.41 140 s 4.50 4.75 s 0.80 1.55
144.41 145 s 1.55 2.50 s 3.10 4.40
144.41 150 s 0.40 0.90 s r r



r - not traded s - no option offered
Last is premium (purchase price).


Source: Wall Street Journal.

Foreign Currency Options listed on the Philadelphia Exchange.

-5- UVA-F-0746

Exhibit 3
DOZIER INDUSTRIES (B)
Foreign Currency Options on December 3, 1985


Options & Strike
Underlying Price Calls-Last Puts-Last

Dec. J an. Mar. Dec. J an. Mar.

12,500 British Pounds - cents per unit
B Pound 120 29.00 s 28.95 r s r
148.86 130 19.10 r r r r r
148.86 135 13.80 r 14.60 0.05 r r
148.86 140 8.80 r 10.00 0.05 r s
148.86 145 4.00 4.50 5.70 0.20 1.05 3.20
148.86 150 0.65 1.65 3.35 r r 5.60
148.86 155 r 0.50 1.70 r r r



r - not traded s - no option offered
Last is premium (purchase price).

Source: Wall Street Journal.

Foreign Currency Options listed on the Philadelphia Exchange.