Wainwright Plastics Business Report-Write my Paper Individual Assignment
Deliverable: The deliverable should be formatted as if you work in the corporate finance department at Wainwright and
are submitting this to the CEO. Please use only your own words. The following section headings are suggested:
Introduction of the problem
Analysis of each hedging alternative with valuations and risks/rewards
Recommendation
Case Scenario:
It is March 20, 2018. You work as an analyst for Wainwright Plastics in Bedford Falls, Massachusetts. Sam Wainwright,
the CEO, has ordered industrial plastic extrusion equipment from Great Britain at a cost of £ 35,250,000.
The payment of £ 35,250,000 is due in in pounds sterling, one year from now, on March 22, 2019. Sam Wainwright is
concerned about the foreign exchange exposure of this upcoming payment. Especially during the last 12 months,
currency market volatility has been high. The increase in volatility has been fueled mostly by concerns about Brexit…,
Assignment: Analyze each of the alternatives below, and then choose one as your suggested hedging strategy. (Assume a
365 day year for all calculations.) The possible hedging choices are:
Other hedging possibilities to include in your analysis
a) Currency futures hedge. Assume there is a currency futures market for the sterling that is fairly priced. Explain in detail the
implementation of this hedge and the cash flows / transactions you would have to make on day one and at the time of the
account payable if you were to use a futures hedge. (How many contracts would you buy or sell, when would you remove the
hedge, etc.)
b) Synthetic option hedge. A synthetic option is where Wainwright can buy the delta-equivalent of the above option strategy,
and adjust this position given future price movements. To execute on this strategy, what initial position would Wainwright
take? Under what circumstances might this be preferable to the actual option strategy?
c) Remain unhedged.
Evaluate the risks and results of this strategy ($ cost) if the $/£ turns out to be 1.25, 1.30, 1.35, 1.40, 1.45, 1.50, 1.55.
d) State Street forward hedge. Explain the implementation of this hedge and the cash flows at maturity.
What is the exchange rate that Wainwright would have to pay if they used this alternative?
e) BNYM option hedge.
i. Use the Black-Scholes model to see the implied volatility of the BNYM option premium using only the data in the
case. In other words, what combinations of the given strike price, maturity, volatility, spot, and the USD
LIBOR/Sterling LIBOR rates would generate the call option price. Include a screenshot of the option model.
ii. Evaluate historical volatility over 3 months and 1 year, using actual spot $/£ prices (not from the case) over the
past three months and past year.
http://www.investopedia.com/ask/answers/021015/how-can-you-calculate-volatility-excel.asp
(Include screenshots of your final calculations – not all the data.)
iii. Look online/Bloomberg for current actual quotations of one year $/£ implied volatility. (Include screenshots.)
iv. Based upon what you found out about actual volatility (above in ii and iii), compare it to the implied volatility you
found (above in i) to see if the BNYM call option is fairly priced.
v. Evaluate the overall hedged results of this strategy ($ cost) if the $/£ turns out to be 1.25, 1.30, 1.35, 1.40, 1.45,
1.50, 1.55 noting in what cases the option is exercised or not, and which exchange rate scenario of the above works
out best for Wainwright if they hedged with the option.
c) Money market hedge. Explain the implementation of this hedge and the cash flows at spot and at maturity. What is the
effective exchange rate that Wainwright would have to pay if they used this alternative?
