Forward Hedging
Response to the following problem:
Wedco Technology of New Jersey exports plastics products to Europe. Wedco decided to price its exports in dollars. Telematics International, Inc. (of Florida), exports computer net work systems to the United Kingdom (denominated in British pounds) and other countries. Telematics decided to use hedging techniques such as forward contracts to hedge its exposure.
a. Does Wedco's strategy of pricing its materials for European customers in dollars avoid economic exposure? Explain
b. Explain why the earnings of Telematics International, Inc., were affected by changes in the value of the pound. Why might Telematics leave its exposure unhedged sometimes?