IntFinMgt 8 1. Explain how a MNC could hedge net receivables in euros with futures contracts. 2.
Question:
IntFinMgt 8
1. Explain how a MNC could hedge net receivables in euros with futures contracts.
2. Explain how a MNC could hedge net payables in Japanese yen with futures contracts.
3. Explain how a Thai corporation could hedge net receivables in Malaysian ringgit with a forward contract.
4. Explain how a U.S. corporation could hedge net payables in Canadian dollars with a forward contract.
5. Suppose that MND Machinery in America sold a machine to a Swiss firm and gave the Swiss client a choice of paying either $10,000 or SF 15,000 in three months.
- a) In the above example, MND Machinery effectively gave the Swiss client a free option to buy up to $10,000 dollars using Swiss franc. What is the 'implied' exercise exchange rate?
- b) If the spot exchange rate turns out to be $0.62/SF, which currency do you think the Swiss client will choose to use for payment? What is the value of this free option for the Swiss client?
- c) What is the best way for MND Machinery to deal with the exchange exposure?
6. Assume that Suffolk Co. negotiated a forward contract to purchase 200,000 British pounds in 90 days. The 90 day forward rate was $1.40 per British pound. The pounds to be purchased were to be used to purchase British supplies. On the day the pounds were delivered in accordance with the forward contract, the spot rate of the British pound was $1.44. What was the real cost of hedging the payables for this U.S. firm (hedging versus not hedging)?
7. From question 6, if on the day the pounds were delivered in accordance with the forward contract, the spot rate of the British pound was $1.34. What was the real cost of hedging the payables for this U.S. firm (hedging versus not hedging)?
8. A US businessman plans to visit Geneva, Switzerland in three months to attend an international business conference. Heexpects to incur the total cost of SF 5,000 for lodging, meals and transportation during his stay. As of today, the spot exchange rate is $0.60/SF and the three-month forward rate is $0.63/SF. He can buy the threemonth call option on SF with the exercise rate of $0.64/SF for the premium of $0.05 per SF. Assume that his expected future spot exchange rate is the same as the forward rate.
- a) Calculate hisexpected dollar cost of buying SF5,000 if he choose to hedge via call option on SF.
- b) Calculate the future dollar cost of meeting this SF obligation if he decide to hedge using a forward contract.
- c) At what future spot exchange rate will he be indifferent between the forward and option market hedges?
9. HOP Shipping Company (HSC) purchased a ship from Mitsubishi Heavy Industry. HSC owes Mitsubishi Heavy Industry 500 million yen in one year. The current spot rate is 124 yen per dollar and the one-year forward rate is 110 yen per dollar. HSC can also buy a one-year call option on yen at the strike price of $.0081 per yen for a premium of .014 cents per yen.
- a) Compute the future dollar costs of meeting this obligation using the forward hedges.
- b) Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar cost of meeting this obligation when the option hedge is used.
- c) At what future spot rate do you think HSC may be indifferent between the option and forward hedge?
College Mathematics For Business Economics, Life Sciences, And Social Sciences
ISBN: 978-0134674148
14th Edition
Authors: Raymond Barnett, Michael Ziegler, Karl Byleen, Christopher Stocker