Suppose that you are a discount retailer selling shoes that you import from Vietnam (currency: Vietnamese Dong [VND]). They charge you 250,000 VND per shoe. The current exchange rate is 23,243 VND/$.

Realizing that you would face significant exchange rate risk, you suggest a risk-sharing agreement. They offer you the following contract: If the exchange rate rises above 25,000 VND for 1 US Dollar, the price will fall to 240,000 VND. If the exchange rate falls below 21,000 VND/$, then the price will rise to 260,000 VND per shoe.

a. Show that this contract does NOT mitigate your currency risk. b. Suggest a modification to the strategy that would mitigate both your and your retailers exchange rate risk.