Foreign Exchange Risk Mitigation Techniques/Activities

Activities
Trade Negotiation Exercise The purpose of the exercise is to provide an opportunity to use exchange rates and barter for a product.

Task 1
Divide the students into groups. If possible each group should consist of 3-5 members (preferably 5 and no fewer than 3). Each group is given USD500,000.00. With this money they will buy from the list of products that are provided. Each product will be sold in a different currency. Once they have made their selections, they are provided with exchange rates to purchase their products. The exercise can be done in one session or over several sessions, but each task should be separated by one-week intervals to accommodate the use of forward rates. The students are also given one-week forward rates. They can choose to purchase at the spot rate or the forward rate. This exercise will provide them with the experience of doing conversions with actual market rates and evaluating various alternatives.

Rates and Products
Mexican peso (MXP) Oil: 1 barrel = MXP60.00 Must buy in lots of 100 barrels (MXP6,000.00 = 100 barrels)

Japanese yen (JPY) Electronic component parts: 1 part = JPY200 Must buy in lots of 1,000 (JPY200,000 = 1,000 parts)

Canadian dollar (CAD) Honey	: 1 barrel = CAD470.00 Must buy in lots of 60 (CAD28,200.00 = 60 barrels)

Australian dollar (AUD) Diamonds: 1 carat = AUD150.00 Must buy in lots of 100 (AUD15,000.00 = 100 carats)

European currency (EUR) Men’s shirts: 1 shirt = EUR15.00 Must buy in lots of 200 (EUR3,000.00 = 200 men’s shirts)

British pound (GBP) Leather belts: 1 belt = GBP5.00 Must buy in lots of 1,000 (GBP5,000.00 = 1,000 leather belts)

Task 2
Inform the students that they must swap out their currency for one more week because they are allowed to defer payment. Each group will be assigned a group number and asked to put on the board the products that they purchased so that the entire class knows what they own. Each group is given an advantage exclusive to their group only and instructed to barter from the other groups for the advantage product that they want to own. The students should be instructed not to share their advantage with any other group. This exercise will help them understand the use of swaps and bartering for goods.

Swap Rates
GROUP 1 - ADVANTAGE Your group will be able to sell all of the oil that you can acquire for 4 times the purchase price from week 1 (MXP6,000.00 = 100 barrels). No other group has this advantage! All other products that you own will produce only double the original purchase price.

GROUP 2 - ADVANTAGE Your group will be able to sell all of the electronic component parts that you can acquire for 4 times the purchase price from week 1 (JPY200,000 = 1,000 component parts). No other group has this advantage! All other products that you own will produce only double the original purchase price.

GROUP 3 - ADVANTAGE Your group will be able to sell all of the honey that you can acquire for 4 times the purchase price from week 1 (CAD28,200.00 = 60 barrels). No other group has this advantage! All other products that you own will produce only double the original purchase price.

GROUP 4 - ADVANTAGE Your group will be able to sell all of the diamonds that you can acquire for 4 times the purchase price from week 1 (AUD15,000.00 = 100 carats). No other group has this advantage! All other products that you own will produce only double the original purchase price.

GROUP 5 - ADVANTAGE Your group will be able to sell all of the men’s shirts that you can acquire for 4 times the purchase price from week 1 (EUR3,000.00 = 200 men’s shirts). No other group has this advantage! All other products that you own will produce only double the original purchase price.

GROUP 6 - ADVANTAGE Your group will be able to sell all of the leather belts that you can acquire for 4 times the purchase price from week 1 (GBP5,000.00 = 1,000 leather belts). No other group has this advantage! All other products that you own will produce only double the original purchase price.

Task 3
Have the groups complete their swaps and pay for their goods. The students will be instructed to sell all of their products as listed in their group advantage sheets from week 2. They must sell their goods in the currency in which they purchased the goods. Once they have completed this process, they will convert the foreign currency back to the US dollars and close their books to determine any profit or loss from the original $500,000.00.