Mini-Case Check the Euro and Ship the Boxes! 
In 2001, Kim Reynolds, president of Markel Corp., located in Plymouth Meeting, Pennsylvania, had to take a 40% pay cut to offset the effects of a skyrocketing dollar. Markel, which makes Teflon-based tubing and insulated wire used in the automotive, appliance, and water-purification industries, has developed a four-part strategy to cope with currency volatility: (1) Charge customers relatively stable prices in their own currencies to build overseas market share, while absorbing currency gains or losses; (2) use forward contracts to lock in dollar revenues for the next several months; (3) improve efficiency to survive when the dollar appreciates; and (4) pray. Reynolds believes his policy of keeping prices set in foreign currencies, mainly the euro, has helped Markel capture 70% of the world market for high-performance, Teflon-coated cablecontrol liners. However, it also means that Markel signs multiyear contracts denominated in euros. When he thinks the dollar will rise, Markel’s CFO, James Hoban, might hedge the company’s entire expected euro revenue stream for the next several months with a forward contract. If he thinks the dollar will fall, he will hedge perhaps 50% and take a chance that he will make more dollars by remaining exposed. Hoban sometimes guesses wrong, as when he sold euros forward assuming—incorrectly—that the euro would continue falling. To make matters worse, Markel entered a multiyear contract with a German firm in 1998 and set the sales price assuming that the euro would be at $1.18 for the next several years. In fact, the euro sank like a rock and Markel had more than $625,000 in currency losses in 2001 and 2002 combined. One of Markel’s responses was to buy new equipment that cut production downtime and waste material. By 2003, most of Markel’s contracts outstanding were written assuming that the euro would be valued between 90 cents and 95 cents. The jump in the euro’s dollar value thus created a currency windfall for Markel. To lock in his dollar costs and reduce his currency risk, Reynolds demands that his Japanese supplier of raw materials sign multiyear dollar contracts.