Dozier Case Analysis

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Dozier Industries Case Write-up

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Introduction

Dozier industries, is an electronic systems company founded in 1973 by Charles l. Dozier. The firm involves itself in marketing the security systems and military sales in particular. Dozier industries, has enjoyed rapid growth until the year 1982 when it got a stiff market competition and forced to start offering its services to small private firms and households. It however did not make much success from the implementation of this strategy thus later shifted to servicing large companies and from the success in its involvement with large corporations, the management decided to expand the business overseas as it was viewed as a good prospect for future growth. Not much success was made until the company received its first contract overseas with a British firm which the company has agreed to complete the awarded project within set time and the offering company has made a 10 percent payment as agreed in contract. The Dozier industries management have foreseen an exchange rate risk thus called upon to find a solution.

Identification of the problem

The Dozier company has been awarded its first contract overseas and with the possibility of the contract being expanded in future it is a good business contract and with prospect of the Dozier industries’ future growth and success overseas. However, the Dozier industries has encountered various issues. The immediate issue is the exchange rate risk in which Dozier is facing the uncertainty of having the pound depreciate. It is already evident that the pound is weakening fast from the exchange rate during the time of awarding contract.  The management is therefore concerned that further depreciation will result in the Dozier Industries making losses as the British pound will exchange less against the dollar than as stipulated during the time of making contract.

Another associated issue that may arise in this scenario is that this is the first contract the Dozier industries will be undertaking overseas thus may not be fully aware and experienced of the challenges that may be faced alongside the exchange rate risk and how to encounter these challenges.

Alternatives and assumptions

There are alternatives to solving the problem of exchange rate risk due to the depreciating value of the pound against the dollar as identified by the management. One of the decisions is to leave the company vulnerable to the exchange rate risk which would imply that the company will make losses if the pound depreciated further or make profits if the value of the pound appreciated against the dollar. Hedging is another prudent alternative to encountering the exchange rate risk. Hedging will entail a forward contract or a spot transaction on the outstanding pound receivable. In the forward contract, the company will have an obligation to deliver pounds in 90 days at a price established today. On the spot hedge transaction, the Dozier industries will have an obligation in 90 days by which it will be required to repay the load and loan repayment will offset the profits or losses on the outstanding pound receivable will be offset (Homaifar, 2004). The company will sell a foreign exchange forward contract to cover the outstanding receivables thus hedge the losses due to changes in the exchange rates (Homaifar, 2004).