Business Assignment Help on CORPORATE EXCHANGE RISK MANAGEMENT and Currency Derivatives

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Business Assignment Help on CORPORATE EXCHANGE RISK MANAGEMENT and Currency Derivatives

CORPORATE EXCHANGE RISK MANAGEMENT

Transaction exposure

 

  1. Dow Chemical has sold SFr 25 million in chemicals to Ciba-Geigy. Payment is due in 180 days.

Spot rate:                                               $0.7957/SFr

180-day forward rate:                                 $0.8095/SFr

180-day U.S. dollar interest rate (annualized):     5.25%

180-day Swiss franc interest rate (annualized):    1.90%

180-day call option at $0.80/SFr:                   2% premium

180-day put option at $0.80/SFr:                   1% premium

 

  1. What is the hedged value of Dow’s receivable using the forward market hedge?
  2. Explain how Dow can use the money market hedge?
  3. Which option hedging strategy would you recommend to hedge its receivables?

 

  1. 2. Magnetronics, Inc., a U.S. company, owes its Taiwanese supplier NT$205 million in three months. The company wishes to hedge its NT$ payable. The current spot rate is NT$1 = US$0.03987, and the three-month forward rate is NT$1 = US$0.04051.

Magnetronics can also borrow/lend U.S. dollars at an annualized interest rate of 12% and Taiwanese dollars at an annualized interest rate of 8%.

  1. What is the U.S. dollar cost for Magnetronics by forward hedge?
  2. What is the U.S. dollar cost by money market hedge? Describe the procedure it would use to get this price.
  3. If the firm wanted to use option hedge, should it buy a call or put on NT$?

 

  1. In contrast to simple examples in the text, many firms do not hedge their transaction exposures fully. Explain three (3) reasons why they may remain partly or fully unhedged.

 

 

  1. 4. Instead of its previous policy of always hedging its foreign currency receivables, Sun Microsystems has decided to hedge only when it believes the dollar will strengthen. Otherwise, it will go uncovered. Comment on this new policy.

 

Operating Exposure:

  1. Explain how matching currency cash flows can offset operating exposure. Give an example of matching currency cash flows.
  2. Why would one company with interest payments due in pounds sterling want to swap those payments for interest payments due in U.S. dollars?

 

  1. What is the “exchange rate pass through”? What is its relevance for hedging?

 

 

  1. An alternative arrangement for managing operating exposure between firms with a continuing buyer-supplier relationship is risk sharing. Explain how risk sharing works.

 

  1. Explain how back-to-back loans can hedge foreign exchange operating exposure.

 

  1. A U.S. company needs to borrow $100 million for a period of seven years. It can issue dollar debt or yen debt.
  2. Suppose the company is an MNC with sales in the U.S. and inputs purchased in Japan. How should this affect its financing choice?
  3. Suppose the company is a multinational firm with sales in Japan and inputs that are primarily determined in dollars. How should this affect its financing choice?

Currency derivatives:

  1. Futures are marked to market while forwards are not. Explain.
  2. What is meant by an option that is in-, at-, or out-of-the-money?
  3. Suppose DEC buys a Swiss franc futures contract (size is SFr 125,000) at a price of $0.86. If the spot rate for the Swiss franc at the date of settlement is SFr 1 = $0.8550, what is DEC’s gain or loss on this contract?
  4. Citigroup sells a call option on euros (contract size is €500,000) at a premium of $0.04 per euro. If the exercise price is $1.34 and the spot price of the euro at expiration is $1.36, what is Citigroup’s profit (loss) on the call option?
  5. Graph the seller’s profit or loss for the call option described in #4. What is the break-even spot exchange rate?
  6. A pound call that has an exercise price of $1.50 and expires in 2 months has a premium of $0.25 per pound. Assuming the current spot exchange rate of $1.55 per pound, what is the intrinsic value of the pound call? Time value?
  7. Discuss why comparative advantage is important in understanding the concept of currency swap.

 

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