Case Study

Wondermouse Company, a family entertainment business wishes to distribute its DVDs into new foreign markets. Irkand, with its newly developed economy presents a brand new market opportunity for Wondermouse Company. The Sr. Vice President (SVP) of International sales, Bob, was able to sign a deal selling 1 million copies of the company's latest hit show "Go Mouse Go" on DVD to Irkland.Desperate to sign the deal so Bob can make his annual sales target, thus ensuring he will receive his annual bonus, Bob agreed to denominate the sale in IRKs, the national currency for Irkland.

The deal was priced at $3M USD when the exchange rate was 1 IRK = $3 USD. The payment for the DVDs will be made 9 months from the date the DVDs are shipped from the U.S. to Irkland.

Questions

1. Did Bob make the right decision for the company and why? 2. Who should he have consulted to ensure this is the right decision and why? 3. What are the risks of entering into a sales contract as this?

Additional information:

Nine months later on the date of payment, the exchange rate was 1 IRK = $2 USD

1. Given this new information, has the Wondermouse Company sustained a foreign exchange gain or loss and if yes, in what amount?

After the contract was signed, the VP of Finance/Risk Management, Susan entered into a forward contract to sell IRKs in 9 months (from the date of shipment) at a forward rate of 1 IRK = $2.50 USD. The forward contract was designated as a fair value hedge of the IRK receivable.

1. Did Susan make the right decision for the company? Why? 2. What is the net gain/loss from this transaction?

3. Who's the hero or heroine at the end?