A bookseller has long done business only within the United States. Recently its managers have decided to branch out. The company now has branches in Southeast Asia, the Middle East, and South America.
A consequence is that the firm is now exposed to foreign exchange risks. It does business with two banks, which offer to provide hedging services for the firm using currency futures contacts and options contracts. Both banks, however, have just announced significant increases in their fees for providing these services.
For this reason, the company's upper management is contemplating limiting their hedging actives to only one of the two currently used hedging methods.
1. What issues do this firm's managers face as they consider the choice between options and futures?
2. Under what circumstances would one hedge with options? Under what circumstances would one hedge with futures? What are the advantages and disadvantages of each hedging alternative?
3. Since the firm is using hedging to manage exchange rate risk, should the firm manage the hedging in-house, or should the firm agree to the higher fees and have the banks continue to manage the hedging activities?