In the case, “F. Mayer Imports: Hedging Foreign Currency Risk”, the hedging practices of an Australian food product distributor are evaluated. The second-generation and private family business, F. Mayer, specialized in distributing high-end, gourmet, food products to the Australian market. With the rise of the “Foodie” culture in Australia, data had shown that household spending on dining out had increased 55%. Thanks to popular cooking shows on television, technology, and an increased awareness of gourmet food, F Mayer saw an opportunity to grow their business. By 2014, the company offered over 1,000 top-quality food delicacies and specialty products. Due to the increased “Foodie” culture, competition in the wholesaling industry was on the rise. Wholesalers were interested in achieving the lowest possible price for any given product or brand so that they could maximize their own profit margins. While wholesale prices for each product had been calculated, and set according to an annual budgeted foreign exchange rate, importers could benefit from any favorable foreign exchange rate movement. This is what allowed F. Mayer to alter the times at which they buy foreign exchange contracts depending on the position of the AUD/EUR. Since there were no formal policies in place, the decisions on when to hedge, how long, and how much to hedge were made daily by the business owner. These decisions were based off their view of the AUD/EUR market at the time.
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Get Help Now!Although this hedging practice benefited F. Mayer for some time, it was not completely sustainable. F. Mayer set their budget rate at AUD/EUR 0.6900 for 2014 since for the previous 12 months, the AUD/EUR had been trading well below this. Because the AUD/EUR was trading well below 0.6900, F. Mayer enjoyed building new client relationships and cementing old ones. This advantageous position allowed F. Mayer to gain profit margins and it gave them more market power to drive further sales. Setting their budget rate at this level benefited the company for a matter of three years and it put them in a great position! However, if the AUD/EUR began trading at a level of 0.7000 or higher, the company would have lost all the margins and, more importantly, their ability to outbid competitors. Although putting this hedging practice in place played out well for the company, it was an extremely risky move to make. With constantly changing trading levels, a company should be more cautious of their decisions when it comes to hedging. Stephen Goode, the CEO of F. Mayer, is considering other options for hedging in the future to avoid loss of profit margin and continue being a leader in the market.
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