a. Review, with relevant calculations, alternatives available to TX Microelectronics to address its foreign exchange exposure. What is your recommendation?

 

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TX Microelectronics is based in Frankfurt, Germany. It has sold an order of special circuits to a US hardware manufacturer and is expecting a payment in six months' time (180 days) of $5 million. Due to increased competition in this market, margins are very tight and TX's profits are expected to be around 10 million for the current year. In recent weeks, the dollar has weakened against the Euro and TX is worried about the amount that it will receive, as it has a loan repayment (denominated in Euros) due a few days after the expected date of the customer's receipt. TX has been advised by its bank that the current USD/EUR exchange rate is 1 = $1.1905. The cost of the option to call (buy) for $ in six months' time at a strike price of $1.28 is 5 cents ($0.05). The 6-month (180 days) deposit rate is 1.55% p.a. while the 6-month $ rate is 2.10% p.a. You have obtained the following forecast for the exchange rate in six months. Exchange rate forecast: Exchange rate forecast 1 = USD 1.31 1.28 1.25 1.21 Probability % 20 38 27 15 TX Microelectronics is based in Frankfurt, Germany. It has sold an order of special circuits to a US hardware manufacturer and is expecting a payment in six months' time (180 days) of $5 million. Due to increased competition in this market, margins are very tight and TX's profits are expected to be around 10 million for the current year. In recent weeks, the dollar has weakened against the Euro and TX is worried about the amount that it will receive, as it has a loan repayment (denominated in Euros) due a few days after the expected date of the customer's receipt. TX has been advised by its bank that the current USD/EUR exchange rate is 1 = $1.1905. The cost of the option to call (buy) for $ in six months' time at a strike price of $1.28 is 5 cents ($0.05). The 6-month (180 days) deposit rate is 1.55% p.a. while the 6-month $ rate is 2.10% p.a. You have obtained the following forecast for the exchange rate in six months. Exchange rate forecast: Exchange rate forecast 1 = USD 1.31 1.28 1.25 1.21 Probability % 20 38 27 15

Answer rating: 100% (QA)

To address its foreign exchange exposure TX Microelectronics has a few alternatives Lets review each of them with relevant calculations 1 Do Nothing If TX Microelectronics does nothing it will be expo... View the full answer