(1) Design hedging strategies for the firm. You need to explain why your chosen hedging strategies are better than the other strategies

 

- Design a hedging strategy 

 

- Explain why 

 

(2) You also need to evaluate the hedging outcomes - what will the outcomes be if exposures are hedged using your hedging strategies and what will the outcomes be if exposures are not hedged. 

 

- Evaluate the hedging outcomes 

 

- Future planning/projection 

 

Transcribed Image Text:

You work for firm PremiumV situated in the United States, and your boss has become concerned about the current economic environment, especially as it is related to the different types of exposures that your firm may face in the near future. You are asked to provide a report, which evaluates your firm's exposure, the risk management implications for your firm, and possible hedging strategies. You are also required to provide a recommendation for what your firm should do. Information about Firm Premium V: 1. Firm PremiumV is a car manufacturer located in the United State. 2. The firm imports parts to USA from foreign suppliers in Japan, South Korea and Mexico. 3. The firm exports cars to Australia, Canada, Germany and Norway. 4. The firm has a payment of 600,000,000 JPY due in 1 months to their Supplier 1 in Japan, a payment of 200,000,000 JPY due in 3 months to their Supplier 2 in Japan, a payment of 8,000,000,000 KRW due in 3 months to their Supplier in South Korea, and a payment of 10,000,000 MXN due in 3 months to their Supplier in Mexico. 5. The firm is due to receive 50,000,000 AUD from their customer in Australia in 3 months, 50,000,000 CAD from their customer in Canada in 6 months, 20,000,000 EUR from their customer in Germany in 3 months and 100,000,000 NOK from their customer in Norway in 3 months. 6. At the moment, the firm imports tires from Japan. The firm hopes to manufacture their own tires. The management of the firm is evaluating the feasibility of establishing a tire factory in Poland. Based on the analyses performed in 2021, the net present value of this project is positive. However, the management is unsure how the current geopolitical tension in Europe is going to affect the prospect of this project. 7. The firm is concerned about the impacts of the high inflation rate globally on their business. 8. The firm is also concerned about the impacts of a series of interest rate rises globally on the firm. You work for firm PremiumV situated in the United States, and your boss has become concerned about the current economic environment, especially as it is related to the different types of exposures that your firm may face in the near future. You are asked to provide a report, which evaluates your firm's exposure, the risk management implications for your firm, and possible hedging strategies. You are also required to provide a recommendation for what your firm should do. Information about Firm Premium V: 1. Firm PremiumV is a car manufacturer located in the United State. 2. The firm imports parts to USA from foreign suppliers in Japan, South Korea and Mexico. 3. The firm exports cars to Australia, Canada, Germany and Norway. 4. The firm has a payment of 600,000,000 JPY due in 1 months to their Supplier 1 in Japan, a payment of 200,000,000 JPY due in 3 months to their Supplier 2 in Japan, a payment of 8,000,000,000 KRW due in 3 months to their Supplier in South Korea, and a payment of 10,000,000 MXN due in 3 months to their Supplier in Mexico. 5. The firm is due to receive 50,000,000 AUD from their customer in Australia in 3 months, 50,000,000 CAD from their customer in Canada in 6 months, 20,000,000 EUR from their customer in Germany in 3 months and 100,000,000 NOK from their customer in Norway in 3 months. 6. At the moment, the firm imports tires from Japan. The firm hopes to manufacture their own tires. The management of the firm is evaluating the feasibility of establishing a tire factory in Poland. Based on the analyses performed in 2021, the net present value of this project is positive. However, the management is unsure how the current geopolitical tension in Europe is going to affect the prospect of this project. 7. The firm is concerned about the impacts of the high inflation rate globally on their business. 8. The firm is also concerned about the impacts of a series of interest rate rises globally on the firm.

Answer rating: 100% (QA)

Hedging Strategies for PremiumV Currency Hedging Given that the firms exposure to multiple currencies due to imports and exports utilizing currency hedging instruments like forward contracts or option... View the full answer