Lands' End is a U.S. mail-order company that sells clothing primarily from catalogs
Initially, all its catalog prices were quoted in U.S. dollars, but recently, the company has expanded and begun printing catalogs with prices denominated in British pounds. Given that the company wants to stand behind its prices for several months, what should the company do if the dollar—pound exchange rate changes?
Answer: We know that Lands End will have to stand behind the pound-denominated prices that it prints in its catalogues for distribution in the UK. British customers want to see pound-denominated prices. They are not interested in looking up an exchange rate to see how many pounds they will have to pay by dividing dollar prices by the dollar-pound exchange rate. Furthermore, saying "Prices are subject to fluctuations due to possible depreciation of the pound" is a non-starter. People will just put the catalogue down. Thus, a depreciation of the pound will certainly result in a loss of revenue and an appreciation of the pound will enhance revenue. If Lands End is concerned about the currency risk, they can engage in hedging, especially after they gain an understanding how well their products will sell. They can then hedge the expected revenue in the forward market.
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