Problem 10.1 P & G India 'roctor and amble7s a&&iliate in India, ' India, procures muc% o& its toiletries product line &rom a Japanese company ecause o& t%e s%orta!e o& +or*in! capital in India, payment terms by Indian importers are typically 180 days or lon!er ' India +is%es to %ed!e a 8 million Japanese yen payable lt%ou!% options are not aailable on t%e Indian rupee (Rs), &or+ard rates are aailable a!ainst t%e yen dditionally, a common practice in India is &or companies li*e ' India to +or* +it% a currency a!ent +%o +ill, in t%is case, loc* in t%e current spot ec%an!e rate in ec%an!e &or a 82 &ee 9sin! t%e &ollo+in! ec%an!e rate and interest rate data, recommend a %ed!in! strate!y Assumptions
180-day account payable, Japanese yen (¥) Spot rate (¥/$) Spot rate, rupees/dollar (Rs/$) Implied (calculated) spot rate (¥/Rs) 180-day &or+ard rate (¥/Rs) 5pected spot rate in 180 days (¥/Rs) 180-day Indian rupee inestin! rate 180-day Japanese yen inestin! rate "urrency a!ent#s ec%an!e rate &ee ' India#s cost o& capital
'ed(in( Alternati)es
Values 8,500,000 120.60 47.75 2.5257 2.4000 2.6000 8.000# 1.500# 4.850# 12.00# Values
120.60 ! 47.75"
$pot %ate %p!*"
%is Assessment
1. %emain +no)ered, settlin( A!P in 180 da-s at spot rate
I& spot rate in 180 days is same as current spot
,65,464.4
2.5257
Ris*y
I& spot rate in 180 days is same as &or+ard rate
,541,666.67
2.4000
Ris*y
I& spot rate in 180 days is epected spot rate
,26/,20.77
2.6000
Ris*y
,541,666.67
2.4000
"ertain
2. u- apanese -en or3ard 180 da-s
Settlement amount at &or+ard rate (Rs) . one- aret 'ed(e
'rincipal /' (¥) discount &actor &or yen inestin! rate &or 180 days 'rincipal needed to meet /' in 180 days (¥) "urrent spot rate (¥/Rs) Indian rupee, current amount (Rs) ' India#s "" carry-&or+ard &actor &or 180 days .uture alue o& money mar*et %ed!e (Rs)
8,500,000.00 0.//26 8,46,724.57 2.5257 ,40,411.26 1.0600 ,540,85./4
orro+ :en, ec%an!e it to Rupee, inest ruppee in its cost o& capital, t%e result is better t%an t%e &or+ard rate 6ote it is payables
"ertain
4. Indian urren- A(ent 'ed(e
'rincipal /' (¥) "urrent spot rate (¥/Rs) "urrent /' (Rs)
8,500,000.00 2.5257 ,65,464.4
'lus a!ent#s &ee (802) ' India#s "" carry-&or+ad &actor &or 180 days on &ee 3otal &uture alue o& a!ent#s &ee (Rs)
16,225.02 1.0600 17,018.52
3otal /', /', &uture alue, alue , /' 4 &ee (Rs)
,58,482.87
)aluation o Alternati)es
3%e currency a!ent is t%e lo+est total cost, in "5R3I6 &uture rupee alue, o& all certain alternaties
usin! t%e cost o& capital to calculate t%e capital epense on '
"ertain
Problem 10.2 $iam ement
Siam "ement, t%e an!*o*-based cement manu&acturer, su&&ered enormous losses +it% t%e comin! o& t%e sian crisis in 1;;< 3%e company %ad been pursuin! a ery a!!ressie !ro+t% strate!y in t%e mid-1;;0s, ta*in! on massie =uantities o& &orei!n currency denominated debt (primarily 9S dollars) %en t%e 3%ai ba%t ()+as dealued &rom its pe!!ed rate o& E0/$ in July 1;;<, Siam7s interest payments alone +ere oer $;00 million on its outstandin! dollar debt (+it% an aera!e interest rate o& 802 on its 9S dollar debt at t%at time) ssumin! Siam "ement too* out $0 million in debt in June 1;;< at 802 interest, and %ad to repay it in one year +%en t%e spot ec%an!e rate %ad stabiliFed at E0/$, +%at +as t%e &orei!n ec%an!e loss incurred on t%e transactionG
Assumptions 9S dollar debt ta*en out in June 1;;< 9S dollar borro+in! rate on debt Initial spot ec%an!e rate, ba%t/dollar, June 1;;< era!e spot ec%an!e rate, ba%t/dollar, June 1;;8
*
Value 50,000,000 8.400# 25.00 42.00
alulation o orei(n 9an(e :oss on %epa-ment o :oan
t t%e time t%e loan +as ac=uired, t%e sc%eduled repayment o& dollar and ba%t amounts +ould %ae been as &ollo+s> $9eduled %epa-ment; Repayment o& 9S dollar debt> 'rincipal Repayment o& 9S dollar debt> Interest 3otal repayment
5c%an!e rate at time o& repayment, ba%t/dollar 'rincipal Repayment o& 9S dollar debt> Interest 3otal repayment
5c%an!e rate at time o& repayment, ba%t/dollar 3otal repayment in 3%ai ba%t ?ess +%at Siam %ad 5@'5"35A or S"B5A9?5A to be repaid mount o& &orei!n ec%an!e loss on debt
* *
50,000,000 4,200,000 54,200,000 25.00 1,55,000,000 1,250,000,000 105,000,000
* *
50,000,000 4,200,000 54,200,000 42.00 2,276,400,000 1,55,000,000" /21,400,000
C80002 t%e payment is C82 %i!%er t%an epectedD
Problem 10. io
¥1110/$ ¥11100/$ ¥1100/$ ¥10;E0/$ 8802 ;E002
Bo+ muc% in 9S dollars +ill io3ron Hedical receie 1) +it% t%e discount and E ) +it% no discount but &ully coered +it% a &or+ard contractG Assumptions io3ron#s 0-day account receiable, Japanese yen Spot rate, ¥/$ 0-day &or+ard rate, ¥/$ ;0-day &or+ard rate, ¥/$ 180-day &or+ard rate, ¥/$ 6umata#s "" io3ron Hedical#s "" Aesired discount on purc%ase price by 6umata
Values 12,500,000 111.40 111.00 110.40 10/.20 8.850# /.200# 4.500#
rent us9 s9ould ompare t3o basi alternati)es, bot9 o 39i9 eliminate t9e urren- ris. 1. Allo3 t9e disount and reei)e pa-ment in apanese -en in as9
ccount recieable (yen) Aiscount &or cas% payment up-&ront (002) mount paid in cas% net o& discount
12,500,000 562,500" 11,/7,500
"urrent spot rate mount receied in 9S dollars by Seattle Scienti&ic
*
111.40 107,158.8/
ccount receiable (yen) 0-day &or+ard rate mount receied in cas% in dollars, in 0 days
*
12,500,000 111.00 112,612.61
Aiscount &actor &or 0 days Seattle#s "" 'resent alue o& dollar cas% receied
0.//24 111,755.82
2. =ot oer an- disounts or earl- pa-ment and o)er eposure 3it9 or3ards
*
rent us% s%ould politely decline 6umata#s o&&er to pay cas% in ec%an!e &or t%e re=uested discount
Problem 10.4 mbraer o ra>il
5mbraer o& raFil is one o& t%e t+o leadin! !lobal manu&acturers o& re!ional Mets (ombardier o& "anada is t%e ot%er) Re!ional Mets are smaller t%an t%e traditional ciilian airliners produced by irbus and oein!, seatin! bet+een 0 and 100 people on aera!e 5mbraer %as concluded an a!reement +it% a re!ional 9S airline to produce and delier &our aircra&t one year &rom no+ &or $80 million lt%ou!% 5mbraer +ill be paid in 9S dollars, it also possesses a currency epo sure o& inputs N it must pay &orei!n suppliers $E0 million &or inputs one year &rom no+ (but t%ey +ill be delierin! t%e sub-components t%rou!%out t%e year) 3%e current spot rate on t%e raFilian real (R$) is R$18E0/$, but it %as been steadily appreciatin! a!ainst t%e 9S dollar oer t%e past t%ree years .or+ard contracts are di&&icult to ac=uire and considered epensie "itiban* rasil %as not eplicitly proided 5mbraer a &or+ard rate =uote, but %as stated t%at it +ill probably be pricin! a &or+ard o&& t%e current 002 9S dollar eurocurrency rate and t%e 1002 raFilian !oernment deposit note
Assumptions Receiable due in one year, 9S dollars 'ayable due in one year, 9S dollars Spot rate, reais per dollar (R$/$) Kne-year 9S dollar eurocurrency interest rate Kne-year raFilian !ot deposit note Implied one year &or+ard rate L spot ( 1 4 iR$ ) / ( 1 4 i$ )
Anal-sis
Values *80,000,000 *20,000,000 1.8240 4.00# 10.50# 1./80
Values
%is Assessment
=et eposure at time o as9 settlements;
Kne year /R due Kne year /' due 6et eposure
*80,000,000 *20,000,000" *60,000,000
"ertain
3%is is a net lon! position, meanin!, 5mbraer +ill be receiin! 9S dollars on net ien t%e %istory o& t%e raFilian reais, t%at it %as traditionally su&&ered &rom rapid depreciation and occasional dealuation, a net lon! position in dollars by most raFilian companies is considered a ery !ood t%in!
as9 settlement o t9e net position;
raFilian reais in one year at current spot rate
%* 10/,440,000.00
Ris*y
raFilian reais in one year at one year &or+ard rate
%* 116,280,000.00
"ertain
In t%is case, %o+eer, because t%e reais is sellin! &or+ard at a considerable discount, t%e net lon! position -- i& sold &or+ard -yields considerably more reais t%an t%e current spot rate It s%ould also be noted, %o+eer, t%at i& t%e reais +ere to &all considerably oer t%e comin! year, by remainin! un%ed!ed 5m braer +ould enMoy !reater reais returns
Problem 10.5 Vi>or P9armaeutials PiFor '%armaceuticals, a 9S-based multinational p%armaceutical company, is ealuatin! an eport sale o& its c%olesterol-reduction dru! +it% a prospectie Indonesian distributor 3%e purc%ase +ould be &or 1,C0 million Indonesian rupia% (Rp), +%ic% at t%e current spot ec%an!e rate o& Rp;,0/$, translates into nearly $1<,000 lt%ou!% not a bi! sale by company standards, company policy dictates t%at sales must be settled &or at least a minimum !ross mar!in, in t%is case, a cas% s ettlement o& $1C8,000 3%e current ;0-day &or+ard rate is Rp;,;0/$ lt%ou!% t%is rate appeared unattractie, PiFor %ad to contact seeral maMor ban*s be&ore een &indin! a &or+ard =uote on t%e rupia% 3%e consensus o& currency &orecasters at t%e moment, %o+eer, is t%at t%e rupia% +ill %old relatiely steady, possibly &allin! to Rp;,00/$ oer t%e comin! ;0 to 1E0 days nalyFe t%e prospectie sale and ma*e a %ed!in! recommendation Assumptions Receiable due in mont%s, in Indonesian rupia% (Rp) Spot rate (Rp/$) 5pected spot rate in ;0 days (Rp/$) -mont% &or+ard rate (Rp/$) Hinimum dollar amount acceptable at settlement
Alternati)es
Values %p1,650,000,000 /,450 /,400 /,/50 *168,000.00
Values
At $pot *174,60.17
%is Assessment
1. %emain +no)ered.
Settle /R in ;0 days at current spot rate I& spot rate in ;0 days is same as current (Rp 1,C0,000,000 / Rp ;,0/$)
*174,60.17
Ris*y
I& spot rate in ;0 days is Rp;,00/$ (Rp 1,C0,000,000 / Rp ;,00/$)
*175,51./1
Ris*y
I& spot rate in ;0 days is Rp;,800/$ (Rp 1,C0,000,000 / Rp ;,;0/$)
*165,82/.15
Ris*y
/R sold &or+ard ;0 days
*165,82/.15
"ertain
O"ost o& coerO is t%e &or+ard discount on Rp
?20.1#
2. $ell Indonesian rupia9 or3ard.
Anal-sis
3%e Indonesian rupia% %as been %i!%ly olatile in recent years 3%is means t%at durin! t%e ;0-day period, any ariety o& economic or political or social eents could lead to an up+ard bounce in t%e ec%an!e rate, reducin! t%e dollar proceeds at settlement to an unacceptable leel 9n&ortunately, t%e &or+ard contract does not result in dollar proceeds +%ic% meet t%e minimum mar!in 3%e cost o& &or+ard coer, E012, is indicatie o& t%e Oarti&icial interest ratesO used by some &inancial institutions +%ile pricin! deriaties in emer!in!, illi=uid, and olatile mar*ets In t%e end, PiFor +ill %ae to decide +%et%er ma*in! t%e sale into t%is speci&ic mar*et is +ort% brea*in! a company policy on minimum proceeds (&or+ard coer) or ta*in! si!ni&icant currency ris* by not usin! a &or+ard coer
Problem 10.6 attel
$118 $11
Assumptions
6ote> it is Must an ccount Receiable in 5uro in ;0 days 3%e epected spot rate is a bot %i!%er t%an t%e &or+ard rate "" is t%e cost o& capital t%at Hattel is %ain! Aollar %as a %i!%er interest rate, dollar is t%ere&ore at a discount to 5uros
Values @ 0,000,000.00 *1.4158 *1.4172 *1.41/5 *1.4200 4.000# .885# *1.4162 5.000# 5.000# /.600#
;0-day /R (Q) "urrent spot rate ($/Q) "redit Suisse ;0-day &or+ard rate ($/Q) arclays ;0-day &or+ard rate ($/Q) 5pected spot rate in ;0 days ($/Q) ;0-day eurodollar interest rate ;0-day euro interest rate Implied ;0-day &or+ard rate (calculated, $/Q) ;0-day eurodollar borro+in! rate ;0-day euro borro+in! rate Hattel 3oys +ei!%ted aera!e cost o& capital ($)
'ed(in( Alternati)es
Values
%is Assessment
1. %emain +no)ered, settlin( A!% in /0 da-s at maret rate
(E0 million euros / &uture spot rate) I& spot rate in ;0 days is same as current spot rate
*42,474,000.00
Ris*y
I& spot rate in ;0 days is same as "redit Suisse &or+ard rate
*42,516,000.00
Ris*y
I& spot rate in ;0 days is same as arclays &or+ard rate
*42,585,000.00
Ris*y
I& spot rate in ;0 days is epected spot rate
*42,600,000.00
Ris*y
Settlement amount at "redit Suisse &or+ard rate
*42,516,000.00
"ertain
Settlement amount at arclays &or+ard rate
*42,585,000.00
"ertain
'rincipal /R in euros discount &actor &or euro borro+in! rate &or ;0 days orro+ euros a!ainst ;0-day /R
@ 0,000,000.00 0./877 @ 2/,62/,62/.6
Bed!in! 2. $ell euros or3ard /0 da-s
Steps>
. one- aret 'ed(e
"urrent spot rate, $/euro 9S dollar current alue Hattel#s "" carry-&or+ard &actor &or ;0 days .uture alue o& money mar*et %ed!e
*1.4158 *41,/4/,62/.6 1.0240 *42,/56,420.74
1/(1 4 (0 ;0/C0))
1 4 (0;C0 ;0/C0) "ertain
)aluation o Alternati)es
3%e money mar*et %ed!e !uarantees Hattel t%e !reatest dollar alue &or t%e /R +%en usin! t%e cost o& capital as t%e reinestment rate (carry-&or+ard rate)
orro+ euro, ec%an!e it to dollar, inest t%e dollar "omment> Suppose Hattel can inest t%e dollar to earn its cost o& capital ;,C2, t%en t%e alue is t%e %i!%est
111
Problem 10.7 obat ompan-
obcat "ompany, 9S-based manu&acturer o& industrial e=uipment, Must purc%ased a orean company t%at produces plastic nuts and bolts &or %eay e=uipment 3%e purc%ase price +as on<,00 million on1,000 million %as already been paid, and t%e remainin! onC,00 million is due in si mont%s 3%e current spot rate is on1,110/$, and t%e C-mont% &or+ard rate is on1,1</$ 3%e simont% orean +on interest rate is 1C2 per annum, t%e si-mont% 9S dollar rate is 2 per annum obcat can inest at t%ese interest rates, or borro+ at E2 per annum aboe t%ose rates si-mont% call option on +on +it% a 1E00/$ stri*e rate %as a 02 premium, +%ile t%e si-mont% put option at t%e same stri*e rate %as a E2 premium
obcat#s +ei!%ted aera!e cost o& capital is 102 "ompare alternate +ays t%at obcat mi!%t deal +it% its &orei!n ec%an!e eposure %at do you recommend and +%yG Assumptions 'urc%ase price o& orean manu&acturer, in orean +on ?ess initial payment, in orean +on 6et settlement needed, in orean +on, in si mont%s "urrent spot rate (on/$) Si mont% &or+ard rate (on/$) obcat#s cost o& capital ("")
Values 7,500,000,000 1,000,000,000" 6,500,000,000 1,110 1,175 10.00#
Kptions on orean +on> Stri*e price, +on Kption premium (percent)
Si-mont% inestment (not borro+in!) interest rate ( per annum) orro+in! premium o& E0002 Si-mont% borro+in! rate (per annum) %is ana(ement Alternati)es 1. %emain uno)ered, main( t9e 3on pa-ment in 6 mont9s at t9e spot rate in eet at t9at date ccount payable (+on) 'ossible spot rate in si mont%s> current spot rat e (+on/$) "ost o& settlement in si mont%s (9S$)
ccount payable (+on) 'ossible spot rate in si mont%s> &or+ard rate (+on/$) "ost o& settlement in si mont%s (9S$)
all ption 1,200.00 .000#
Put ption 1,200.00 2.400#
+nited $tates 4.000# 2.000# 6.000#
Borea 16.000# 2.000# 18.000#
Values
ertaint-
*
6,500,000,000 1,110 5,855,855.86
9ncertain
*
6,500,000,000 1,175 5,51,/14.8/
9ncertain
*
6,500,000,000 1,175.00 5,51,/14.8/
"ertain
2. or3ard maret 9ed(e. u- 3on or3ard si mont9s
ccount payable (+on) .or+ard rate (+on/$) "ost o& settlement in si mont%s (9S$)
&or+ard loo*s =uite promissin!
. one- maret 9ed(e. 9an(e dollars or 3on no3, in)est or si mont9s.
ccount payable (+on) Aiscount &actor at t%e +on interest rate &or C mont%s on needed no+ (payable/discount &actor) "urrent spot rate (+on/$) 9S dollars needed no+ "arry &or+ard rate &or si mont%s ("") 9S dollar cost, in si mont%s, o& settlement
* *
borro+ dollar, ec%an!e it to +o n, inest in +on interest rate Aollar cost is at t%e company#s cost o& capital
6,500,000,000 1.080 6,018,518,518.52 1,110.00 5,422,088.76 1.050 5,6/,1/.1/
"ertain
4. all option 9ed(e. =eed to bu- 3on C all on 3on"
Kption principal "urrent spot rate (+on/$) 'remium cost o& option (2) Kption premium (principal/spot rate 2 pm) dollar cost o& +on (stri*e at 1E00/$+on) 'remium carried &or+ard si mont%s (pm 10, "") 3otal net cost o& call option %ed!e i& eercised
* * *
I eerised 6,500,000,000 1,110.00 .000# 175,675.68 5,416,666.67 184,45/.45/ 5,601,126.1 Haimum
I not eerised 1,00.00
* *
5,000,000.00 184,45/.46 5,184,45/.46
3%e &or+ard contract proides t%e lo+est "5R3I6 cost %ed!in! met%od &or payment settlement I&, %o+eer, t%e &irm beliees t%e endin! spot rate +ill be a +ea*er on, on1,E00/$ or %i!%er, t%en t%e call option +ould be a lo+er cost alternatie 3%is +ould re=uire, %o+eer, t%at t%e &irm accept &orei!n ec%an!e ris* and be +illin! to s u&&er t%e %i!%er cost o& t%e call option in t%e eent t%at t%e on did not &all to t%e needed leel
suppose t%e spot rate is %i!%er t%an you could !et &rom t%e call contract
Problem 10.8 ADuate9
=uatec% is a 9S-based company +%ic% manu&actures, sells, and installs +ater puri&ication e=uipment Kn pril 11t% t%e company sold a system to t%e "ity o& 6a!asa*i, Japan, &or installation in 6a!asa*i7s &amous loer ardens (+%ere 'uccini7s Hadame utter&ly +aited &or t%e return o& ?t 'in*erton) 3%e sale +as priced in yen at ¥E0,000,000, +it% payment due in t%ree mont%s Spot ec%an!e rate> Kne-mont% &or+ard rate> 3%ree-mont% &or+ard> Kne-year &or+ard> one- %ates Kne mont% 3%ree mont%s 3+ele mont%s
¥118E/$ (closin! mid-rates) ¥11<
apan 00;<2 00;<2 01E02
Eierential <81E2 8<2 8<002
Note: 3%e interest rate di&&erentials ary sli!%tly &rom t%e &or+ard discounts on t%e yen because o& time di&&erences &or t%e =uotes 3%e spot ¥118E/$, &or eample, is a mid-point ran!e Kn pril 11, t%e spot yen traded in ?ondon &rom ¥1180/$ to ¥11<0/$
dditional in&ormation> =uatec%7s Japanese competitors are currently borro+in! yen &rom Japanese ban*s at a spread o& E percenta!e points aboe t%e Japanese money rate =uatec%#s +ei!%ted aera!e cost o& capital is 1C2, and t%e company +is%es to protect t%e dollar alue o& t%is receiable Three-month options from Kyushu Bank:
T "all option on ¥E0,000,000 at eercise price o& ¥11800/$> a 12 premium T 'ut option on ¥E0,000,000, at eercise price o& ¥11800/$> a 2 premium a) %at are t%e costs and bene&its o& alternatie %ed!esG %ic% +ould you recommend, and +%yG b) %at is t%e brea*-een reinestment rate +%en comparin! &or+ard and money mar*et alternatiesG Assumptions mount o& receiable, Japanese yen ( ¥)
Spot ec%an!e rate at time o& sale ( ¥/$) oo*ed alue o& sale (amount/spot rate) Aays receiable due =uatec%#s "" "ompetitor borro+in! premium, yen ( ¥) or3ard rates and premiums Kne-mont% &or+ard rate ( ¥/$) 3%ree-mont% &or+ard rate ( ¥/$) Kne-year &or+ard rate ( ¥/$)
Values 20,000,000 118.255 *16/,126.04 /0 16.0# 2.0# or3ard %ate 117.760 116.80 112.450
Premium 5.04# 4.88# 5.16#
In)estment rates, # per annum 1 mont% mont%s 1E mont%s
+nited $tates 4.8750# 4./75# 5.1875#
apan 0.0/75# 0.0/75# 0.1250#
Pur9ased options -mont% call option on yen -mont% put option on yen
$trie -en!*" 118.000 118.000
Premium 1.0# .0#
Values
ertaint-
a. Alternati)e 'ed(es 1. %emain uno)ered.
ccount receiable (yen) 'ossible spot rate in ;0 days (yen/$) "as% settlement in ;0 days (9S$)
20,000,000 118.255 *16/,126.04
9ncertain
2. or3ard maret 9ed(e.
ccount receiable (yen) .or+ard rate (+on/$) "as% settlement in ;0 days (9S$)
20,000,000
116.80 *171,188./1
"ertain
. one- maret 9ed(e.
ccount receiable (yen) Aiscount &actor &or ;0 days :en proceeds up &ront "urrent spot rate (+on/$) 9S dollars receied no+ "arry &or+ard at =uatec%#s "" 'roceeds in ;0 days 4. Put option 9ed(e. =eed to sell -en C put on -en" Kption principal "urrent spot rate (+on/$) 'remium cost o& option (2) Kption pm (principal/spot rate 2 pm)
I& option eercised, dollar proceeds ?ess 'm carried &or+ard ;0 days 6et proceeds in ;0 days
20,000,000 1.0052 1/,8/5,858 118.255 *168,245.8
1.0400 *174,/75.20
1 4 ((000;< 4 0E) ;0/C0)
1 4 (1C ;0/C0) "ertain
20,000,000 118.255 .000# *5,07.78 *16/,4/1.5
5,276.72" *164,214.7/
10 carry-&or+ard rate Hinimum
3%e put option does n ot 9R6355 t%e company o& settlin! &or t%e boo*ed amount 3%e money mar*et and &or+ard %ed!es do t%e money mar*et yieldin! t%e %i!%er proceeds b" reae)en rate bet3een t9e mone- maret and t9 e or3ard 9ed(e is determined b- t9e rein)estment rate; *168,245.8 Honey mar*et, 9S$ up-&ront *171,188./1 .or+ard contract, 9S$, end o& ;0 days 101.750# (1 4 ) $1C8,E8 (14) L $1<1,188;1 1.74/54# .or ;0 days rea*een rate, 2 per annum *0.06//8
Problem 10./ ompass %ose "ompass Rose, ?td, a "anadian manu&acturer o& raincoats, does not selectiely %ed!e its transaction eposure Instead, i& t%e date o& t%e transaction is *no+n +it% certainty, all &orei!n currency-denominated cas% &lo+s must utiliFe t%e &ollo+in! mandatory &or+ard contract coer &ormula> ompass %oseFs anadator- or3ard o)er Paying the points forward Receiving the points forward
0?/0 da-s 75# 100#
/1?180 da-s 60# /0#
180 da-s 50# 50#
"ompass Rose epects to receie multiple payments in Aanis% *roner oer t%e net year Ar ,000,000 is due in ;0 days Ar E,000,000 is due in 180 days and Ar 1,000,000 is due in one year 9sin! t%e &ollo+in! spot and &or+ard ec%an!e rates, +%at +ould be t%e amount o& &or+ard coer re=uired by company policy by periodG
Assumptions Spot rate, Ar/"$ -mont% &or+ard rate, Ar/"$ C-mont% &or+ard rate, Ar/"$ 1E-mont% &or+ard rate, Ar/"$ $out9 aeFs posures /R due in mont%s, Ar /R due in C mont%s, Ar /R due in 1E-mont%s, Ar
or3ard Eisount
Values 4.70 4.71 4.72 4.74
?0.85# ?0.85# ?0.84#
0?/0 da-s ,000,000
/1?180 da-s
180 da-s
2,000,000
1,000,000
Anal-sis & posure ana(ement 3%e Aanis% *rone is sellin! &or+ard at a discount ersus t%e "anadian dollar> it ta*es more Ar/"$ &or+ard "ompass Rose is receiin! &orei!n currency, Ar, at &uture dates (Olon! ArO) "ompass Rose is t%ere&ore epectin! to ': 3B5 'KI63S .KRRA %eDuired or3ard o)er or ompass %ose; /R due in mont%s, Ar /R due in C mont%s, Ar /R due in 1E-mont%s, Ar EBr or3ard o)er /R due in mont%s, Ar /R due in C mont%s, Ar /R due in 1E-mont%s, Ar 5pected "anadian dollar alue o& Ar sold &or+ard
0?/0 da-s 75#
/1?180 da-s
180 da-s
60# 50#
2,250,000
1,200,000
477,707.01
254,27.2/
500,000 105,485.2
Problem 10.10 Pupule
Spot rate (3$/$) -mont% &or+ard rate (3$/$) -mont% 3ai+an dollar deposit rate -mont% dollar borro+in! rate -mont% call option on 3$
0 E0 1002 C002 not aailable
nalyFe t%e costs and ris*s o& eac% alternatie, and t%en ma*e a recommendation as to +%ic% alternatie 3%omas "arson s%ould c%oose Assumptions c=uisition price -mont% /', 6e+3ai+an dollars (3$) Spot rate (3$/$) -mont% &or+ard rate (3$/$) -mont% 3ai+an dollar deposit rate -mont% dollar borro+in! rate -mont% call option on 3$ 3%omas "arson#s credit line +it% an* o& Ba+aii
*
)aluation o Alternati)es
Values 7,000,000 .40 2.40 1.500# 6.500# not a)ailable 200,000 ost
ertaint-
1. Eo =ot9in( ?? Hait mont9s and bu- <* spot
I& spot rate is t%e same as current spot rate
*
20/,580.84
%is-
I& spot rate is t%e same as -mont% &or+ard rate
*
216,04/.8
%is-
*
216,04/.8
ertain
lt%ou!% t%is +ould do not%in! to coer t%e currency ris*, t%ere +ould be no re=uired payment or borro+in! &or -mont%s 2. u- <* or3ard ?mont9s
ssured cost o& 3$ at -mont% &or+ard rate 3%e purc%ase o& a &or+ard contract +ould not re=uire any cas% up-&ront, but t%e an* o& Ba+aii +ould reduce %is aailable credit line by t%e amount o& t%e &or+ard 3%is is a non-cas% epense
. one- aret 'ed(e; 9an(in( +$* or <* no3, depositin( or ?mont9s until pa-ment
c=uisition price in 3$ needed in -mont%s Aiscounted bac* -mont%s at 3$ deposit rate mount o& 63$ needed no+ &or deposit Spot rate, 3$/$ 9S$ needed no+ &or ec%an!e 9S$ carry-&or+ard rate (-mont% dollar borro+in! rate) "arry-&or+ard &actor o& 9S$ &or -mont% period 3otal cost in 9S$ o& settlin! /' in -mont%s +it% Honey Har*et Bed!e
*
7,000,000 0.//6 6,/7,848 .40 208,7/7.85
*
6.500# 1.016 212,1/0.81
ertain
3%e currency ris* is eliminated, but since 3%omas "arson +ould %ae to ec%an!e t%e money up &ront, it + ould re=uire %im to borro+ t%e money, increasin! %is debt outstandin! &or t%e entire mont%s Eisussion.
3%is is a di&&icult decision 3%e &or+ard contract appears to be t%e pre&erable c%oice, protectin! %im a!ainst an appreciatin! 3$, and creatin! a certain cas% purc%ase payment 3%e problem, %o+eer, +ill be +%et%er t%e an* o& Ba+aii +ill allo+ %im to purc%ase a &or+ard &or t%e &ull $E1C,0;8, +%ic% is sli!%tly aboe %is credit line currently in place I& %is relations%ip is !ood +it% t%e ban*, t%ey most li*ely +ould increase %is line su&&iciently to allo+ t%e &or+ard contract
Problem 10.11 9ronos
"%ronos 3ime 'ieces o& oston eports +rist +atc%es to many countries, sellin! in local currencies to +atc% stores and distributors "%ronos prides itsel& on bein! &inancially conseratie t least <02 o& eac% indiidual transaction eposure is %ed!ed, mostly in t%e &or+ard mar*et, but occasionally +it% options "%ronos#s &orei!n ec%an!e policy is s uc% t%at t%e <02 %ed!e may be increased up to a 1E02 %ed!e i& dealuation or depreciation appears imminent "%ronos %as Must s%ipped to its maMor 6ort% merican distributor It %as issued a ;0-day inoice to its buyer &or Q1,C0,000 3%e current spot rate is $1EEE/Q, t%e ;0-day &or+ard rate is $1EE<0/Q "%ronos7s treasurer, Hanny BernandeF, %as a ery !ood trac* record in predictin! ec%an!e rate moements Be currently beliees t%e euro +ill +ea*en a!ainst t%e dollar in t%e comin! ;0 to 1E0 days, possibly to around $11C/Q
Assumptions ccount recieable in ;0 days (Q) Initial spot ec%an!e rate ($/Q) .or+ard rate, ;0 days ($/Q) 5pected spot rate in ;0 to 1E0 days ($/Q)> "ase U1 5pected spot rate in ;0 to 1E0 days ($/Q)> "ase UE
Values @ 1,560,000 *1.2224 *1.2270 *1.1600 *1.2600 'ed(ed t9e inimum
'ed(ed t9e aimum
Proportion o eposure to be 9ed(ed 3otal eposure (Q) %ed!ed proportion Hinimum %ed!e in euros (eposure min prop) at t%e &or+ard rate ($/Q) loc*in! in ($)
70# @ 1,560,000 70# @ 1,0/2,000 *1.2270 *1,/,884
120# @ 1,560,000 120# @ 1,872,000 *1.2270 *2,2/6,/44
ase J1; ndin( spot rate 'roportion uncoered (s%ort) I& endin! spot rate is ($/Q) Palue o& uncoered proportion ($)
@ 468,000 *1.1600 *542,880
@ 12,000" *1.1600 *61,/20"
Palue o& coered proportion (&rom aboe)
*1,/,884
*2,2/6,/44
3otal net proceeds, coered 4 uncoered
*1,882,764
*1,/5,024
ase J2; ndin( spot rate 'roportion uncoered (s%ort) I& endin! spot rate is ($/Q) alue o& uncoered proportion ($)
@ 468,000 *1.2600 *58/,680
@ 12,000" *1.2600 */,120"
I 9ronos
Palue o& coered position (&rom aboe) 3otal net proceeds, coered 4 uncoered en9mar; ull 100#" or3ard o)er
*
1,/,884
*
2,2/6,/44
*1,/2/,564
*1,/0,824
*1,/14,120
*1,/14,120
3%is is not a conseratie %ed!in! policy ny time a &irm may c%oose to leae any proportion uncoered, or purc%ase coer &or more t%an t%e eposure (t%ere&ore creatin! a net s%ort position) t%e &irm could eperience nearly unlimited losses or !ains
Problem 10.12 :u- 1 ?uc*y 1 Jeans o& San ntonio, 3eas, is completin! a n e+ assembly plant near uatemala "ity &inal construction payment o& V8,00,000 is due in si mont%s (WVX is t%e symbol &or uatemalan =uetFals) ?uc*y 1 uses E02 per annum as its +ei!%ted aera!e cost o& capital 3oday7s &orei!n ec%an!e and interest rate =uotations are as &ollo+s>
"onstruction payment due in si-mont%s (/', =uetFals) 'resent spot rate (=uetFals/$) Si-mont% &or+ard rate (=uetFals/$) uatemalan si-mont% interest rate (per annum) 9S dollar si-mont% interest rate (per annum) ?uc*y 1#s +ei!%ted aera!e cost o& capital ("")
8,400,000 7.0000 7.1000 14.000# 6.000# 20.000#
?uc*y 1#s treasury mana!er, concerned about t%e uatemalan economy, +onders i& ?uc*y 1 s%ould be %ed!in! its &orei!n ec%an!e ris* 3%e mana!er7s o+n &orecast is a s &ollo+s> 5pected spot rate in si-mont%s (=uetFals/$)> Bi!%est epected rate (re&lectin! a si!ni&icant dealuation) 5pected rate ?o+est epected rate (re&lectin! a stren!t%enin! o& t%e =uetFal)
8.0000 7.000 6.4000
%at realistic alternaties are aailable to ?uc*y 1 &or ma*in! paymentsG %ic% met%od +ould you select and +%yG H9at realisti alternati)es are a)ailable to :u- 1K
ost
ertaint-
1. Hait si mont9s and mae pa-ment at spot rate
Bi!%est epected rate
*
1,050,000.00
%is-
5pected rate
*
1,150,684./
%is-
?o+est epected rate
*
1,12,500.00
%is-
*
1,18,0/8.5/
ertain
* *
7,850,467.2/ 1,121,4/5. 1.10 1,2,644.86
ertain
2. Pur9ase Duet>als or3ard si?mont9s (/' diided by t%e &or+ard rate) . als toda-, in)est or si?mont9s =uetFals needed today (/' discounted 180 days) "ost in dollars today (=uetFals to $ at spot rate) &actor to carry dolla rs &or+ard 180 d ays (1 4 (""/E)) "ost in dollars in si-mont%s ($ carried &or+ard 180 days )
3%e second c%oice, t%e &or+ard contract, results in t%e lo+est cost alternatie amon! certain alternaties
Problem 10.1 urton anuaturin( Jason Stedman is t%e director o& &inance &or urton Hanu&acturin!, a 9S-based manu&acturer o& %and-%eld computer systems &or inentory mana!ement urton7s system combines a lo+-cost actie bar-code used on inentory (t%e bar-code ta!s emit an etremely lo+-!rade radio &re=uency) +it% custom-desi!ned %ard+are and so&t+are +%ic% trac*s t%e lo+-!rade emissions &or inentory control urton %as completed t%e sale o& a bar-code system to a ritis% &irm, 'e!! Hetropolitan (9), &or a total payment o& Y1,000,000 3%e &ollo+in! ec%an!e rates +ere aailable to urton on t%e &ollo+in! dates correspondin! to t%e eents o& t%is speci&ic eport sale ssume eac% mont% is 0 days
Eate
)ent
.ebruary 1 Harc% 1
'rice =uotation &or 'e!! "ontract si!ned &or sale "ontract amount, pounds 'roduct s%ipped to 'e!! 'roduct receied by 'e!! rand Het ma*es payment
June 1 u!ust 1 September 1
$pot %ate *!L" 1.7850 1.7465 L1,000,000 1.768/ 1.7840 1.72/0
or3ard %ate *!L" 1.7771 1.781
Ea-s or3ard o or3ard %ate 210 180
1.7602 1.7811 ?????????
/0 0 ?????????
Anal-sis
a 3%e sale is boo*ed at t%e ec%an!e rate eistin! on June 1, +%en t%e product is s%ipped to 'e!! Hetropolitan, and t%e s%ipment is cate!oriFed as an account receiable 3%is sale is t%en compared to t%at alue in e&&ect on t%e date o& cas% settlement, t%e di&&erence bein! t%e &orei!n ec%an!e !ain (loss) Palue as settled Palue as boo*ed .@ !ain (loss)
1 million pounds $1
*1,72/,000 *1,768,/00 */,/00"
b 3%e alue o& t%e &orei!n ec%an!e !ain (loss) +ill depend upon +%en Jason actually purc%ases t%e &or+ard contract ecause many &irms do not de&ine an OeposureO as arisin! until t%e date t%at t%e product is s%ipped (loss o& p%ysical control oer t%e !oods) and t%e sale is boo*ed on t%e income statement, t%at is a common date &or t%e purc%ase o& t%e &or+ard contract or3ard ontrat pur9ased on une 1
Palue o& &or+ard settlement Palue as boo*ed .@ !ain (loss)
1 million pounds $1
*1,760,200 *1,768,/00 *8,700"
more a!!ressie alternatie is &or Jason to purc%ase t%e &or+ard contract on t%e date t%at t%e contract +as si!ned, Harc% 1, loc*in!in urton#s 9S dollar settlement amount a &ull ;0 days earlier in t%e transaction eposure#s li&e span or3ard ontrat pur9ased on ar9 1
Palue o& &or+ard settlement Palue as boo*ed .@ !ain (loss)
1 million pounds $1<81/pound 1 million pounds $1
*1,78,100 *1,768,/00 *0,800"
6ote t%at in t%is case i& Jason %ad coered &or+ard on Harc% 1st rat%er t%an June 1st, t%e amount o& t%e &orei!n ec%an!e loss +ould %ae been een !reater, alt%ou!% O&ully %ed!edO 3%e di&&erence is o& course t%e result o& t%e &or+ard rate c%an!in! +it% spot rates and interest di&&erentials
Problem 10.14 ia etals, In. Hicca Hetals, Inc is a specialty materials and metals company located in Aetroit, Hic%i!an 3%e company specialiFes in speci&ic precious metals and materials +%ic% are used in a ariety o& pi!ment applications in many ot%er industries includin! cosmetics, appliances, and a ariety o& %i!% tinsel metal &abricatin! e=uipment Hicca Must purc%ased a s%ipment o& p%osp%ates &rom Horocco &or C,000,000, dir%ams, payable in si mont%s Hicca7s cost o& capital is 8C002
Si-mont% call options on C,000,000 dir%ams at an eercise price o& 1000 dir%ams per dollar are aailable &rom an* lHa!%rub at a premium o& E2 Si-mont% put options on C,000,000 dir%ams at an eercise price o& 1000 dir%ams per dollar are aailable at a premium o& 2 "ompare and contrast alternatie +ays t%at Hicca mi!%t %ed!e its &orei!n ec%an!e transaction eposure %at is your recommendationG Assumptions S%ipment o& p%osp%ates &rom Horocco, Horoccan dir%ams Hicca#s cost o& capital ("") Spot ec%an!e rate, dir%ams/$ Si-mont% &or+ard rate, dir%ams/$
Kptions on Horoccan dir%ams> Stri*e price, dir%ams/$ Kption premium (percent)
Si-mont% interest rate &or borro+in! (per annum) Si-mont% interest rate &or inestin! (per annum) %is ana(ement Alternati)es
Values 6,000,000 14.000# 10.00 10.40 all ption 10.00 2.000#
Put ption 10.00 .000#
+nited $tates 6.000# 5.000#
oroo 8.000# 7.000#
Values
ertaint-
1. %emain uno)ered, main( t9e dir9am pa-ment in si mont9s at t9e spot rate in eet at t9at date ccount payable (dir%ams) 'ossible spot rate in si mont%s -- t%e current spot rate (dir%ams/$) "ost o& settlement in si mont%s (9S$)
*
6,000,000 10.00 600,000.00
9ncertain
ccount payable (dir%ams) 'ossible spot rate in si mont%s -- &or+ard rate (dir%ams/$) "ost o& settlement in si mont%s (9S$)
*
6,000,000 10.40 576,/2.08
9ncertain
*
6,000,000 10.40 576,/2.08
"ertain
. one- maret 9ed(e. 9an(e dollars or dir9ams no3, in)est or si mont9s. ccount payable (dir%ams) 6,000,000.00 1.05 Aiscount &actor at t%e dir%am inestin! rate &or C mont%s Air%ams needed no+ &or inestin! (payable/discount &actor) 5,7/7,101.45 "urrent spot rate (dir%ams/$) 10.00 * 57/,710.14 9S dollars needed no+ 1.070 "arry &or+ard rate &or si mont%s ("") * 620,28/.86 9S dollar cost, in si mont%s, o& settlement
"ertain
2. or3ard maret 9ed(e. u- dir9ams or3ard si mont9s.
ccount payable (dir%ams) Si mont% &or+ard rate, dir%ams/$ "ost o& settlement in si mont%s (9S$)
4. all option 9ed(e. =eed to bu- dir9ams C all on dir9ams" Kption principal "urrent spot rate, dir%ams/$ 'remium cost o& option Kption premium (principal/spot rate 2 pm)
I& option eercised, dollar cost at stri*e price o& 1000 dir%ams/$ 'lus premium carried &or+ard si mont%s (pm 10<, "") 3otal net cost o& call option %ed!e i& eercised
* * *
6,000,000.00 10.00 2.000# 12,000.00 600,000.00 12,840.000 612,840.00
Haimum
3%e lo+est cost certain alternatie is t%e &or+ard I& Hicca +ere to epect t%e dir%am to depreciate si!ni&icantly oer t%e net si mont%s, it may c%oose t%e call option
Problem 10.15 aria Gon>ale> and
Assumptions ;0-day /R in pounds Spot rate, 9S$ per pound ($/ £) ;0-day &or+ard rate, 9S$ per pound ($/ £) -mont% 9S dollar inestment rate -mont% 9S dollar borro+in! rate -mont% 9 inestment interest rate -mont% 9 borro+in! interest rate 'ut options on t%e ritis% pound> Stri*e rates, 9S$/pound ($/ £) Stri*e rate ($/Y) 'ut option premium Stri*e rate ($/Y) 'ut option premium 3rident#s "" Haria onFaleF#s epected spot rate in ;0 days, 9S$ per pound ($/ £)
Value L,000,000.00 *1.7620 *1.7550 6.000# 8.000# 8.000# 14.000# *1.75 1.500# *1.71 1.000# 12.000# *1.7850
Alternati)e J1; %emain +no)ered Palue o& /R +ill be ( million pounds endin! spot rate ($/pound)) I& spot rate is t%e same as current spot rate I& endin! spot rate is t%e same as current &or+ard rate I& endin! spot rate is t%e epected spot rate
%ate *!pound"
Proeeds
*1.7620 *1.7550 *1.7850
*5,286,000.00 *5,265,000.00 *5,55,000.00
Alternati)e J2; or3ard ontrat 'ed(e Sell t%e pounds &or+ard mont%s, loc*in! in t%e &or+ard rate 'ound /R at t%e &or+ard rate (pounds &or+ard)
%ate *!pound"
Proeeds
*1.7550
*5,265,000.00
Alternati)e J; one- aret 'ed(e orro+s a!ainst t%e /R, receiin! Y up-&ront, ec%an!in! into 9S$ mount o& /R in ;0-days, in pounds Aiscount &actor, pound borro+in! rate, &or -mont%s 'roceeds o& borro+in!, up-&ront, in pounds 5c%an!ed to 9S$ at current spot rate o& 9S$ receied a!ainst /R, up-&ront 9S$ need to be carried &or+ard &or comparison> "arry-&or+ard rate, "" &or ;0 days Honey Har*et Bed!e, 9S$, at end o& ;0 days
%ate *!pound"
Proeeds
*1.7620
*5,107,246.8
Alternati)e J4; Put ption 'ed(es
Kption premium 6otional principal o& option (pounds) Spot rate ($/pound) Kption premium, 9S$ "arry-&or+ard &actor, "", &or ;0 days 3otal premium cost, in ;0 days 'roceeds &rom put option i& eercised ?ess cost o& premium, includin! time-alue 6et proceeds &rom put options, in ;0 days> Hinimum 5ndin! spot rate needed to be s uperior to &or+ard> 'roceeds &rom ec%an!in! pounds &or 9S$ spot ?ess cost o& option (allo+ed to epire K3H) 6et proceeds &rom put option, uneercised
L,000,000.00 0./662 L2,8/8,550.72
1.000 *5,260,46.77
$trie %ate *!pnd" 1.75 1.500# L,000,000.00 *1.7620 *7/,2/0.00 1.000 *81,668.70
$trie %ate *!pnd" 1.71 1.000# L,000,000.00 *1.7620 *52,860.00 1.000 *54,445.80
*5,250,000.00 81,668.70" *5,168,1.0
*5,10,000.00 54,445.80" *5,075,554.20
*1.7825 *5,47,500.00 81,668.70" *5,265,81.0
*1.772 *5,1/,600.00 54,445.80" *5,265,154.20
nalysis> Haria onFaleF +ould receie t%e most certain 9S$ &rom t%e &or+ard contract, $,EC,000 t%e money mar*et %ed!e is less attractie as a result o& t%e %i!%er borro+in! costs in t%e 9 no+ 3%e t+o put options +ould yield unattractie amounts i& t%ey %ad to be eercised s s%o+n, t%e $1< stri*e price put option +ould be superior to t%e &or+ard i& t%e endin! spot rate +ere $1<8E or %i!%er t%e $1<1 stri*e price +ould be superior to t%e &or+ard i& t%e endin! spot rate +ere $1<<E or %i!%er
Problem 10.16 :arin '-draulis Kn Hay 1st, ?ar*in Bydraulics, a +%olly o+ned subsidiary o& "aterpillar (9S), sold a 1E me!a+att compression turbine to Rebec*e3er+ille!er "ompany o& t%e 6et%erlands &or Q,000,000, payable QE,000,000 on u!ust 1st and QE,000,000 on 6oember 1st ?ar*in deried its price =uote o& Q,000,000 on pril 1st by diidin! its normal 9S dollar sales price o& $E0,000 by t%e t%en current spot rate o& $10800/Q
y t%e time t%e order +as receied and boo*ed on Hay 1st, t%e euro %ad stren!t%ened to $11000/Q, so t%e sale +as in &act +ort% Q,000,000 $11000/Q L $,00,000 ?ar*in %ad already !ained an etra $80,000 &rom &aorable ec%an!e rate moements 6eert%eless ?ar*in#s director o& &inance no+ +ondered i& t%e &irm s%ould %ed!e a!ainst a reersal o& t%e recent trend o& t%e euro .our approac%es +ere possible>
1 Bed!e in t%e &or+ard mar*et 3%e -mont% &or+ard ec%an!e =uote +as $110C0/Q and t%e C-mont% &or+ard =uote +as $1110/Q E Bed!e in t%e money mar*et ?ar*in could borro+ euros &rom t%e .ran*&urt branc% o& its 9S ban* at 8002 per annum Bed!e +it% &orei!n currency options u!ust put options +ere aailable at a stri*e price o& $11000/Q &or a premium o& E02 per contract, and 6oember put options +ere aailable at $11000/Q &or a premium o& 1E2 u!ust call options at $11000/Q could be purc%ased &or a premium o& 02, and 6oember call options at $11000/Q +ere aailable at a EC2 premium Ao not%in! ?ar*in could +ait until t%e sales proceeds +ere receied in u!ust and 6oember, %ope t%e recent stren!t%enin! o& t%e euro +ould continue, and sell t%e euros receied &or dollars in t%e spot mar*et ?ar*in estimates t%e cost o& e=uity capital to be 1E2 per annum s a small &irm, ?ar*in Bydraulics is unable to raise &unds +it% lon!-term debt 9S 3-bills yield C2 per annum %at s%ould ?ar*in doG Assumptions ;0-day .or+ard rate, $/ € 180-day .or+ard rate, $/ € 9S 3reasury bill rate ?ar*in#s borro+in! rate, euros, per annum ?ar*in#s cost o& e=uity ptions on euros u!ust maturity options 6oember maturity options
Values *1.1060 *1.110 .600# 8.000# 12.000# $trie *!euro" *1.1000 *1.1000
Eate April 1 a- 1
all ption .0# 2.6#
Put ption 2.0# 1.2#
Au(ust %eei)able @ 2,000,000
=o)ember %eei)able @ 2,000,000
mount o& receiable, in euros Respectie &or+ard rates ($/ €) 9S dollar proceeds as %ed!ed ($) "arry &or+ard to 6o 1st at "" 3otal 9S$ proceeds on 6o 1st 3otal o& bot% payments
@ 2,000,000 *1.1060 *2,212,000 1.0 *2,278,60
@ 2,000,000 *1.110 *2,226,000 ????? *2,226,000
mount o& receiable, in euros Aiscount &actor &or euro &unds, period "urrent proceeds &rom discountin!, euros "urrent spot rate ($/ €) "urrent 9S dollar proceeds "arry &or+ard rate &or t%e period 9S dollar proceeds on &uture date 3otal o& bot% payments
@ 2,000,000 1.02 @ 1,/60,784 *1.1000 *2,156,86 1.06
@ 2,000,000 1.04 @ 1,/2,077 *1.1000 *2,115,85 1.06
*2,286,275
*2,242,08
mount o& receiable, in euros uy put options &or maturities (2 spot alue) "arry &or+ard &or t%e period 'remium cost carried &or+ard to 6o 1
@ 2,000,000 *44,000" 1.06 *46,640"
@ 2,000,000 *26,400" 1.06 *27,/84"
*2,200,000 1.0
*2,200,000 ????
*2,266,000
*2,200,000
Valuation o Alternati)e 'ed(es mount o& receiable, in euros a. 'ed(e in t9e or3ard maret
*4,504,60
b. 'ed(e in t9e mone- maret
*4,528,582
. 'ed(e 3it9 options
ross put option alue i& eercised "arried &or+ard mont%s to 6o 1 ross proceeds, 6o 1 3otal net proceeds, a&ter premium deduction, 6o 1
*4,/1,76
d. Eo not9in( remain uno)ered"
mount o& receiable, in euros 5ndin! spot ec%an!e rate ($/ €)
@ 2,000,000 KKK
@ 2,000,000 KKK
3%e money mar*et %ed!e proides t%e %i!%est certain outcome I& ?ar*in Bydraulics beliees t%e euro +ill stren!t%en ersus t%e dollar oer t%e comin! mont%s, and it is +illin! to ta*e t%e currency ris*, t%e put option %ed!es could be considered
ini?ase; anbur- Impe India" ?apura#s 3ur*is% sale is &or 3? C;,8E ($E0,000 at t%e current spot rate o& 3?1<;/$) 3%e receiable is &or settlement C0 days &rom no+ (end o& January, it is currently t%e end o& 6oember) Since ?apura %as no real insi!%t -- or ie+ -- on t%e direction o& ec%an!e rate moements, t%ere is no motiation to use currency options Kptions re=uire a directional ie+ by t%e user i& t%ey are to be considered pre&erable to &or+ard contracts Assumptions Indian rupees per 9S dollar Indian rupees per euro Japanese yen per rupee Indian rupees per 3ur*is% lira 3ur*is% lira per 9S dollar 9S dollars per euro (calculated) 3ur*is% lira per euro (calculated) urren- o In)oie )aluation o Alternati)es ri(inal reei)able $pot rate
$pot 45.800 60./611 1.8250 0.71/2 1.47/ 1.02 1./677
60?Ea- or3ard 46.7000 61./000 1.8100 0./500 1.4800 1.255 1./617
+$ dollar posure 6/,825 <: 1.47/ *250,000 46.7000 I=% 11,675,000
uro posure 6/,825 <: 1./677 @ 187,/48 61./000 I=% 11,6,/64
"%oosin! t%e currency o& inoice is a =uestion o& +%ic% %ed!e, i& any, ?apura uses I& t%e C0-day &or+ard rates are applied to t%e t%ree di&&erent currency o& inoice c%oices, t%e !reatest I6R proceeds result &rom usin! a dollar currency o& inoice and coerin! t%e eposure +it% a C0-day &or+ard rate to sell dollars &or rupees lt%ou!% ?apura could leae t%e receiable uncoered, !ien t%e olatility o& ec%an!e rate mar*ets, and %o+ Oc%eapO &or+ards are at t%is time (meanin! t%ey di&&er little &rom t%e current spot rate as a result o& suc% lo+ interest rates in t%e dollar, euro, and yen mar*ets), it +ould mean ta*in! on unneeded ris* money mar*et %ed!e +ould be etremely di&&icult to accomplis% in t%e immediate time &rame 3%e need &or a ban* relations%ip, t%e establis%ment o& a line o& credit in order to secure a loan, and t%e unattractie interest rates (t%e 3ur*is% lira borro+in! rate +ould cut seerely into t%e alue o& t%e receiable), all ma*e t%e money mar*et %ed!e impractical &or t%is sale
