Suppose you are a sales manager for Johnson & Johnson, an American pharmaceutical and consumer goods...
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Suppose you are a sales manager for Johnson & Johnson, an American pharmaceutical and consumer goods manufacturer. You have just signed a deal to export pharmaceutical products to a German distributor. The deal is denominated in euro, and you will receive 800,000 when you deliver the products in 90 days. Assume that you can borrow and lend over the 90-day period at 0.45% in US dollars and at 0.60% in euro. In addition, you obtain the following spot and swap quotes from a currency dealer: Spot 1.1204/08 USD/EUR 90 days 66/40 (a) You could do a forward hedge to eliminate your transaction exchange risk. Should you buy or sell a 90-day euro forward? What are the euro and dollar cash flows associated with the forward hedge? The Forward hedge gives: (b) Alternatively, you could do a money market hedge. Which of the two hedging alternatives is superior, and why? Suppose you are a sales manager for Johnson & Johnson, an American pharmaceutical and consumer goods manufacturer. You have just signed a deal to export pharmaceutical products to a German distributor. The deal is denominated in euro, and you will receive 800,000 when you deliver the products in 90 days. Assume that you can borrow and lend over the 90-day period at 0.45% in US dollars and at 0.60% in euro. In addition, you obtain the following spot and swap quotes from a currency dealer: Spot 1.1204/08 USD/EUR 90 days 66/40 (a) You could do a forward hedge to eliminate your transaction exchange risk. Should you buy or sell a 90-day euro forward? What are the euro and dollar cash flows associated with the forward hedge? The Forward hedge gives: (b) Alternatively, you could do a money market hedge. Which of the two hedging alternatives is superior, and why?
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a To eliminate the transaction exchange risk using a forward hedge ... View the full answer
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