Hedging Currency Risks at Duke Power

Abstract

Duke Power, an electric generating and distributing company serving portions of North and South Carolina, had been a pioneer in the production of nuclear power. Duke Power needed replacement steam generator tubes for three of its nuclear-generating units, and selected Sumitomo Corporation in Japan to manufacture the tubes. Sumitomo was one of the few corporations in the world capable of producing specialty high-strength replacement tubes. The exchange rate between the dollar and the yen would float up and down with supply and demand forces over the delivery period. Because the value of the yen floated, and because the contract between Duke Power and Sumitomo was priced in yen, Duke faced considerable transaction risk. Duke Power did have the opportunity to reduce its transaction risk by hedging its position in the foreign exchange (FX) market. FX market financial instruments have become a common tool for businesses involved in foreign trade. Once Duke Power made the decision to hedge its transaction risk, it needed to address the questions of when in the transaction to enter a hedging contract and, then, what hedging vehicle to utilize