Assignment Consider you are the Assistant Treasurer at Digital Semiconductor Inc. Last year the sales revenue of the company was $25 billion. Digital Semiconductor Inc. has been engaged in the development, manufacture, and marketing of microprocessor-based equipment. Although 25% of its sales are currently abroad, the rm has full-edged manufacturing facilities in France and Brazil. An assembly plant in Hong Kong exists primarily to solder Japanese semiconductor chips onto circuit boards and screw these into Brazilian-made boxes for shipment to the United States, C anada, Germany, and France. The French subsidiary has developed half of its sales to other European countries. In a recent meeting, it has been decided to repatriate 63.5 million on September 18th. You also know that the company has an agreement to buy 300,000 RAM chips at 9000 each semi-annually from a Japanese rm, and it is this payment that will fall due on June 15th. You are sitting in your office and looking at the computer screen, Your eyes find ways to look at today's date at the comer ofthe screen: it's February 14. 2012. You feel a little nervous \"l have to nish the hedging memo today before someone in the Finance Committee starts asking questions. What are the best ways to hedge the repatriation of3.5 million from France and pay the Japanese rm for RAM chips? Forward hedge? Money market hedge? Option hedge? Not sure", You have started looking for the spot. forward, and currency options and rtures quotations from the company's Bloomberg terminal. After some hassle, you nally nd them and get the printouts. You have started talking to yourself: \"Yen is at 78 and might increase in coming days, but if that doesn't happen then. ..? Okay, an option to buy yen on June 10 might be just the thing, Not sure". You mutter, \"are currency options a better means of hedging exchange risk for an international rm than traditional forward exchange contracts or futures contracts'".7 You see, the option prices are quoted in US. cents per euro. Yen are quoted in hundredths of a cent. Lookin g at these prices. you have decided to determine how much the euro or yen would have to change to make the option worthwhile. You make a mental note that you can borrow in the Eurocurrency market at LIBOR + 1% and lend at LIBID. (See the attached pages for quotes and the highlighted market quotes.) Prepare a memo analyzing currency hedging for the Finance Committee addressing which strategy would be better: forward hedge? Money market hedge? Option hedge? Why? (Detail calculation and explanation required). I Find the euro receivable and the yen payable I Calculate the relevant results for the forward hedge, money market hedge, and options market hedge. Then compare the outcomes and make a decision in favour of a hedge. Explain why you choose a particular hedge over others. I For both receivable and payable. nd the future spot rate at which the rm would be indifferent between the option and the forward outcomes. HINTS: I All relevant numbers are highlighted in yellow for convenience. I In table 3, you nd the 7month forward rate. For payable, you need the 4-month forward rate from Table 2. I Borrowing and lending interest rates are given in the tables \"Euro Money Rates," \"Japanese Yen Money Rates," and "USD Money Market Rates" (Tables 4, 5. 6). I You can borrow in the Eurocurrency market at LlBOR + 1%, you must add 1% with the rate you pick from table 4. I Since you are given both the bid and the ask, you borrow at the ask rate and lend at the bid rate. I Remember that these interest rates are annualized. So, when you calculate PV or FV of borrowing or investment, you need to consider the actual number of days for the hedging period, which means, interest rates need to be multiplied by (the actual number ofdays/SGO). I The option premium is given in cents per euro in Table 7, and cents per 100 yen in Table 8. I If you want to buy a call or a put. you pay the \"ask" since the dealer wants to sell at that premium. I You must also calculate the rate below or above the future spot rate, for which option might be preferable if that is the case. EURO MONEY RATES i 7 of 10 TIME BID ASK CHANGE HIGH LOW PRV CLS 17:01 1000 3500 +.0750 .4500 1450 3) EU DR2T -T/N 1500 13:5 1500 4000 4) EU DR 3T .2800 2250 -S/N .2750 20:00 .1500 4000 +.0250 3000 1450 5) EU DRIZ 2500 -1 WK 12:32 3200 3700 - 0350 6) EUDR2Z 4100 3000 -2WK .3100 20:00 2500 5000 4450 7) EU DR3Z 2200 3750 -3WK 20:00 .3000 5000 5000 2700 8) EU DRA 4000 -1 MO 16:23 4500 570 .0600 9) EU DR B 7200 -2 MO 5100 20:00 5700 6000 7200 .7100 6550 10) EU DRC 6600 -3MC 19:59 9500 1.0000 1 1) EUDRD 1.1000 .9600 4MO 9750 19:59 1.0600 1.110 .0200 1.1550 12) EU DRE 1.0650 -5MO 19:59 1.1050 1.1800 1.2300 -.0100 13) EUDRE 1.3500 1.1700 -6MO 1.2150 19:5 12900 1.3400 -.0100 14) EUDRG 1.3700 1.3000 -7MO 1.3250 19:5 1.3500 1.4100 -.0100 1.4600 15) EUDRH 1.3650 -8MO 1.3850 19:59 1.4200 1.470 -.0100 1.5250 16) EUDRI 1.4350 -9MO 1.4550 19:59 1.4800 1.5300 .0100 17) EUDRJ 1.6500 1.4900 -10MO 19:59 1.5150 1.5400 1.5900 -.0100 1.6400 18) EUDRK 1.5650 -11 MO 19:59 1.5750 1.5900 1.6500 -.0100 1.6950 1.5900 1.6300 Table 5: Japanese Yen Money Market Rates JAPANESE YEN MONEY RATES SECURITY LAST CHANGE TIME PREVIOUS BID ASK DEPOSITS 2) O/N 0010 6.01 .0010 3) T/N 0010 0010 0850 19:59 4) S/N 0850 0100 1550 .1600 7:28 .1550 5) 1 Week .0800 .2300 .1050 19:59 1050 6) 2 Week 0300 .1800 1050 19:59 .1050 7) 3 Week 0300 1300 1800 19:58 1300 .0800 8) 1 Month 1800 . 1050 19:59 9) 2 Month 1050 0600 1500 19:59 1300 10) 3 Month 1000 .170 .1600 19:59 1700 1 1) 4 Month .1400 2000 .2100 19:59 12) 5 Month .2100 2600 .1820 2420 19:59 .2600 13) 6 Month .2300 310 2900 19:59 14) 7 Month .3100 2800 .340 19:59 15) 8 Month .3600 .3300 4000 .3900 19:59 .4000 16) 9 Month 3700 .4300 450 19:59 17)10 Mont 4500 .4800 .4200 19:59 .4800 4800 18)1 1 Mont 4500 5000 5100 19:59 .5000 19) 1 Year 5300 4700 .5300 19:59 5300 5000 .5600 Table 6: USD Money Market Rates USD MONEY MARKET RATES SECURITY TIME BID ASK Fed Funds CHANGE HIGH LOW PRV CLS 2) FDFD 15:49 1 1000 .14000 Deposite Rates .23000 .09000 12000 4) O/N 19:59 0800 ,1800 5) USD Depo T/N .2900 1300 .1300 14:23 1300 2000 6) USD Depo -.0500 S/N 2000 .1350 ,2500 20:00 0800 1800 7) USD Depo 1 Week 1600 1300 1300 19:59 1000 2000 8) USD Depo 2 Week 2300 1500 1500 20:00 1200 2200 9) USD Depo 3 Week 3000 1690 20:00 1700 1300 2300 10) USD Depo 1 Mo 2450 1400 1800 20:00 1700 2400 1 1) USD Depo 2 Mo 3950 2050 20:00 2050 .3000 3600 12) USD Depo 3 Mo 8250 2800 .3300 20:00 .4600 5100 13) USD Depo 4 Mo 8750 3700 4850 20:00 5700 6300 14) USD Depo 5 Mo 7108 .5631 5950 20:00 .6500 .7000 15) USD Depo 6 Mo 7584 6203 6750 19:24 .7300 .7800 16) USD Depo 7 Mo 1.3550 4550 .7550 0:03 7850 .8350 -.0100 17) USD Depo 8 Mo 1.6300 .7351 1.6300 20:00 8300 .8800 18) USD Depo 9 Mo .9116 .7919 .8550 20:01 8800 1.8300 .3750 1.3550 1.73004 of 10 Key Cross Currency Rates - Majors Rate: Spot Monitor. Last Price Source: BGN Bloomberg BGN (NY) USD EUR JPY GBP CHF CAD AUD NZD HKD NOK SEK SEK 6.7062 8.7768 08545 10.500 7.2701 6.6934 7.1352 5.5546 8649 1.1662 NOK 5.7505 7.5260 07327 9.0038 6.2341 5.7396 .1184 4.7631 74170 .85749 HKD 7.7531 10.147 09879 12.139 8.4052 7.7384 82492 6.4218 1.3483 1.1561 NZD 1.2073 01538 1.8903 1.3088 12050 1 2846 . 15572 20995 . 18003 AUD .93987 1.2301 01198 1.4716 1.0189 93809 .77848 12122 16344 14015 CAD 1.0019 1.3113 01277 1.5687 1.0862 .0660 8298 12923 17423 14940 CHE 92243 1.2072 01175 1.4443 92068 98144 76403 11897 16041 13755 GBP .63868 .8358 00814 69239 63746 67954 52901 08238 11106 .09524 JPY 78.0640 102.71 122.88 85.078 78.33 33.500 65.003 10.122 13.647 11.702 EUR .77408 00974 1.1963 82834 76263 81296 63288 09855 13287 11394 USD 1.2919 .01281 1.5657 1.0841 99810 1.0640 82829 12898 17390 14912 Table 2: 4-Month forward Rates Currency Group Key Cross Currency Rates -Majors Monitor: Outrights 02/14/12 Rate: 4 Month Bbamberg USD EUR GBP CHF CAD AUD NZD HKD SEK JPY NOK SEK 6.7042 8.7760 08542 10.497 7.2692 6.6924 7.1355 5.5526 86471 1.1661 JOK 5.7494 '.5262 .07326 .0022 6.2339 5.7393 5.1193 4.7618 74156 85758 HKD 7.7531 10.149 09879 12.140 8.4065 7.7395 82520 6.4214 1.3485 1.1565 NZD 12074 1.5805 .01538 1.8905 1.3091 1205 12851 15573 21000 . 18010 AUD .93955 1.2299 .01197 1.4711 1.0187 93790 77816 12118 16342 14014 CAD 1.0018 1.3113 .01276 1.5685 1.0862 1.0662 .82969 12921 17424 .14942 CHF .92228 1.2073 01175 1.4441 92066 .98162 .76386 11896 16041 .13757 GBP .63867 83604 00814 .69249 63754 .67976 .52896 08237 11108 09526 JPY 78.482 102.74 122.88 85.096 78.344 3.532 $5.00 10.123 13.650 11.706 EUR .76392 .00973 1.1961 82830 76258 81307 .63270 .09853 13287 11 395 USD .3090 .01274 1.5658 1.0843 99824 .0643 82823 12898 1 7393 .14916 Table 3: 7-Month forward Rates Currency Group - Key Cross Currency Rates - Major 02/14/12 Rate: 7 Month Monitor: Outrights Source: BGN |SEK 6.7045 8.7761 08543 10.497 72694 6.6926 7.1355 5.5528 86472 1.1661 NOK 5.7495 7.5261 07326 9.0021 62339 5.7394 6.1192 4.7619 .74155 85757 HKD 7.7534 10.149 09879 12.139 8.4066 7.7397 82518 6.4215 1.3485 1.1564 NZD 1.2074 1.5805 01538 1.8904 1.3091 12053 12850 15573 21000 18009 AUD 93959 1.2299 01197 1.471 1.018 93794 77820 . 12119 .16342 14014 CAD 1.0018 1.3113 1276 1.5685 1.0862 1.0662 82969 12920 .17423 14942 CHF 92229 1.2073 01175 1.4440 92066 98159 .76387 11895 . 1604 . 13756 GBP 63869 83604 .00814 69250 63756 67975 52898 08238 11109 09526 JPY 78.484 102.73 122.88 85.09 78.345 83.52 65.002 10.123 13.650 11.706 EUR .77394 00973 1.196 8283 76260 .8130 63272 .09853 .1328 11395 USD 1.2921 01274 1.5657 1.0843 .99824 1.0643 82823 12898 17393 14915\f