Forward versus Money Market Hedge on Receivables. Assume the following information:

      180‑day U.S. interest rate = 8%

      180‑day Euro interest rate = 9%

      The 180‑day forward rate of Euro = $1.50

      Spot rate of Euro = $1.48

 

      Assume that Seneca Inc. from the United States will receive 400,000 Euros in 180 days.  Would it be better off using a forward hedge or a money market hedge?  Substantiate your answer with estimated revenue for each type of hedge.

 

       

1. How much US$ would Seneca receive with a forward contract.
2. How much US$ would Seneca receive with a money market hedge?
   Hedging With Put Options. As treasurer of Universal Inc. (a U.S. exporter to Singapore), you must decide how to hedge (if at all) future receivables of 260,000 Singapore dollars 90 days from now.  Put options are available for a premium of $ 0.03 per unit and an exercise price of $ 0.48 per Singapore dollar.  The forecasted spot rate of the S$ in 90 days follows:

 

                                    Future Spot Rate                              Probability

                                           $0.44                                                 30%

                                             0.40                                                 50

                                             0.38                                                 20

 

      Given that you hedge your position with options, create a probability distribution for U.S. dollars to be received in 90 days.

      

1. Provide a probability distribution for U.S. dollars to be received in 90 days.
2. Calculate the expected value of the put option?
   
   Investing in a Portfolio. Sarasota Co., a US company plans to invest its excess cash in Mexican pesos for one year.  The one‑year Mexican interest rate is 19%.  The probability of the peso's percentage change in value during the next year is shown below:

 

         Possible Rate of Change

        in the Mexican Peso Over                   Probability of

        the Life of the Investment                     Occurrence

                          -15%                                            20%

                            -4%                                            50%

                              0%                                            30%

          1. What is the expected value of the effective yield based on this information?  

           2. Given that the U.S. interest rate for one year is 7%, what is the probability that a one‑year invest­ment in pesos will generate a lower effective yield than could be generated if Longboat Co. simply invested domestically?

Answer rating: 100% (QA)

To determine the best hedging strategy for Seneca Inc and calculate the expected revenue for each ty... View the full answer