Ocean Plc. is an Ireland based company, that is in import and export trade with USA based companies.

Various large transactions that are expected to be due in 5 months time are shown below. For the calculation of future and forward contracts, assume a date of 1st of June. 

  

Required:

1. a) Explain minimum of four alternative hedging techniques to hedge 5 months currency risk with all relevant supporting calculations.
2. b) Discuss why money market hedge is better than traded derivatives for hedging currency risk?

Transcribed Image Text:

Firms Firm A Firm B Firm C Exports "Millions" $539 121 Exchange rates Spot exchange rate 3 months forward exchange rate 1 year forward exchange rate Euro rate up to 6 months Dollar rate up to 6 months Interest rates for Ocean Plc. are as follows: Borrowing $/ Currency futures (68750) Sep 2.0949 Dec 2.0885 6.05% 4.4% $/ Imports "Millions" 165 $979 $825 2.1072-2.1131 2.0973 -2.1032 2.0791-2.0839 Lending 4.62% 2.20% Firms Firm A Firm B Firm C Exports "Millions" $539 121 Exchange rates Spot exchange rate 3 months forward exchange rate 1 year forward exchange rate Euro rate up to 6 months Dollar rate up to 6 months Interest rates for Ocean Plc. are as follows: Borrowing $/ Currency futures (68750) Sep 2.0949 Dec 2.0885 6.05% 4.4% $/ Imports "Millions" 165 $979 $825 2.1072-2.1131 2.0973 -2.1032 2.0791-2.0839 Lending 4.62% 2.20%

Answer rating: 100% (QA)

a Four Alternative Hedging Techniques to Hedge 5 Months Currency Risk 1 Forward Contract Firm A has a euro receivable of 165 To hedge against currency ... View the full answer