Ronnie Nillson is the CFO of an internationally operating chain of hot dog stands, Wiener International Ltd. The company produces its own hot dogs, and the production largely depends on three commodities – hot dog buns, bone marrow, and artificial food colouring. The company’s production facilities are located in Sweden, and it buys bone marrow from Poland, food colouring from the Czech Republic, and hot dog buns locally. It operates the stands in many countries, but the majority of the business is in Sweden, Germany, and the United Kingdom. Because the commodity prices have been growing recently, especially due to increasing demand from China, and because the currency exchanges have been very volatile, Wiener International turned out a loss last year. That is why Ronnie wants to devise a hedging strategy to prevent that from happening again. Help Ronnie to hedge against the foreign exchange between the currencies of all mentioned countries and the commodity prices’ volatility. Assess how derivatives can be used in such a situation and what the cost impact on the profitability of Wiener International is.Please note that there are no traded futures for bone marrow and artificial food colouring, but prices of both these commodities correlate with the price of beef.
Ronnie Nillson is the CFO of an internationally operating chain of hot dog
stands, Wiener International Ltd. The company produces its own hot dogs,
and the production largely depends on three commodities – hot dog buns,
bone marrow, and artificial food colouring. The company’s production
facilities are located in Sweden, and it buys bone marrow from Poland, food
colouring from the Czech Republic, and hot dog buns locally. It operates the
stands in many countries, but the majority of the business is in Sweden,
Germany, and the United Kingdom.
Because the commodity prices have been growing recently, especially due
to increasing demand from China, and because the currency exchanges have
been very volatile, Wiener International turned out a loss last year. That is
why Ronnie wants to devise a hedging strategy to prevent that from
happening again.
Help Ronnie to hedge against the foreign exchange between the currencies
of all mentioned countries and the commodity prices’ volatility. Assess how
derivatives can be used in such a situation and what the cost impact on the
profitability of Wiener International is.Please note that there are no traded futures for bone marrow and artificial
food colouring, but prices of both these commodities correlate with the price
of beef.
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