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You are a bright new hire in the risk-management division at SoftCola, a multinational cola company, and have recently been put in charge of managing the euro/dollar exchange-rate risks that SoftCola faces. Consider SoftCola's operations in France and the United States.
1. Suppose monthly revenues in France average 20 million euros and monthly production and distribution costs average 15 million euros. If the resulting profits are repatriated to the production unit in the United States monthly, what risk does this production unit face? How might it hedge this risk?
2. SofeCola's worldwide retirement benefits unit is located in the United States and has an obligation to pay its retired French employees 5 million euros monthly. What risk does this unit face and how could it hedge the risk?
3. Given the transactions of the production and retirement units as given previously, what do you conclude are the exchange-rate risks faced by SoftCola as a whole in France? Does SoftCola need to enter into forward contracts?
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