Esprit Holdings, the fashion retailer, owes Mex$7 million in 30 days for a recent shipment of...

 

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Esprit Holdings, the fashion retailer, owes Mex$7 million in 30 days for a recent shipment of clothes from Mexico. Esprit's treasurer is considering hedging the company's peso exposure on this shipment and is looking for some help in figuring out what her different hedging options might cost and which option is preferable. You call up your favorite foreign exchange trader and receive the fol- lowing interest rate and exchange rate quotes: Spot rate: Forward rate (30 days): 30-day put option on euros at Mex$17.66/€: 30-day call option on euros at Mex$17.95: Mex$17.80/€ Mex$17.95/€ 1% premium 3% premium Euro 30-day interest rate (annualized): 1.0% Peso 30-day interest rate (annualized): 3.5% Based on these quotes, the treasurer presents you with a series of questions that she would like you to address. Questions 1. What hedging options are available to Esprit? 2. What is the hedged cost of Esprit's payable using a forward market hedge? 3. What is the hedged cost of Esprit's payable using a money market hedge? 4. What is the hedged cost of Esprit's payable using a put option? 5. At what exchange rate is the cost of the put option just equal to the cost of the forward market hedge? To the cost of the money market hedge? 6. How can Esprit construct a currency collar? What is the net premium paid for the currency collar? Using this currency collar, what is the net cost of the payable if the spot rate in 30 days is Mex$17.50/€? Mex$17.80/€? Mex$18.30/€? 7. What is the preferred alternative? 8. Suppose that Esprit expects the 30-day spot rate to be Mex$18.30/€. Should it hedge this payable? What other factors should go into Esprit's hedging decision? Esprit Holdings, the fashion retailer, owes Mex$7 million in 30 days for a recent shipment of clothes from Mexico. Esprit's treasurer is considering hedging the company's peso exposure on this shipment and is looking for some help in figuring out what her different hedging options might cost and which option is preferable. You call up your favorite foreign exchange trader and receive the fol- lowing interest rate and exchange rate quotes: Spot rate: Forward rate (30 days): 30-day put option on euros at Mex$17.66/€: 30-day call option on euros at Mex$17.95: Mex$17.80/€ Mex$17.95/€ 1% premium 3% premium Euro 30-day interest rate (annualized): 1.0% Peso 30-day interest rate (annualized): 3.5% Based on these quotes, the treasurer presents you with a series of questions that she would like you to address. Questions 1. What hedging options are available to Esprit? 2. What is the hedged cost of Esprit's payable using a forward market hedge? 3. What is the hedged cost of Esprit's payable using a money market hedge? 4. What is the hedged cost of Esprit's payable using a put option? 5. At what exchange rate is the cost of the put option just equal to the cost of the forward market hedge? To the cost of the money market hedge? 6. How can Esprit construct a currency collar? What is the net premium paid for the currency collar? Using this currency collar, what is the net cost of the payable if the spot rate in 30 days is Mex$17.50/€? Mex$17.80/€? Mex$18.30/€? 7. What is the preferred alternative? 8. Suppose that Esprit expects the 30-day spot rate to be Mex$18.30/€. Should it hedge this payable? What other factors should go into Esprit's hedging decision?

Answer rating: 100% (QA)

1 What hedging options are available to Esprit Esprit has several options available to hedge its Mexican peso transaction exposure These include the forward market hedge money market hedge and the pur... View the full answer