Proctor and Gamble (P&G) is one of the top ten major U.S. exporters. This month, P&G...

 

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Proctor and Gamble (P&G) is one of the top ten major U.S. exporters. This month, P&G delivers a large shipment of household and personal care items to a major distributor in Austria (a country that uses the euro). The accounts receivable, €30 million, is due in 90 days, standard terms for the consumer products industry in Europe. P&G's treasury team has collected the following currency and market quotes. The company's foreign exchange advisors believe the euro will be at about $1.4200/€ in 90 days. Assume that P&G's management does not use currency options in currency risk management activities. Current spot rates ($/ €) = $1.4158 Credit Suisse 90-day forward rate ($/ €) = 1.4172 P&G's WACC ($) = 9.600% euro-dollar interest rate = 4.000% per annum euro interest rate = 3.885% per annum eurodollar borrowing rate = 5.000% per annum euro borrowing rate = 5.000% per annum note: interest rates are per annum (which means per year), so you need to find the periodic interest rate for 90 days by multiplying the annual interest rate x 90/360 1. What would the result be if P&G chose to remain unhedged? Show how you arrived at your answer with numbers under three different scenarios for the future spot rate: same as current spot rate; what P&G's foreign exchange advisors believe; what the Credit Suisse forward rate says. Are these results certain or risky? 2. What would the result be if P&G chose to pursue a forward market hedge with Credit Suisse? Show how you arrived at your answer with numbers. Is this result certain or risky, why? 3. What would the result be if P&G chose to pursue a money market hedge? You can assume P&G would reinvest loan proceeds in operations, so use the company's WACC as the carry forward rate. Show how you arrived at your answer with numbers. Is this result certain or risky, why? Proctor and Gamble (P&G) is one of the top ten major U.S. exporters. This month, P&G delivers a large shipment of household and personal care items to a major distributor in Austria (a country that uses the euro). The accounts receivable, €30 million, is due in 90 days, standard terms for the consumer products industry in Europe. P&G's treasury team has collected the following currency and market quotes. The company's foreign exchange advisors believe the euro will be at about $1.4200/€ in 90 days. Assume that P&G's management does not use currency options in currency risk management activities. Current spot rates ($/ €) = $1.4158 Credit Suisse 90-day forward rate ($/ €) = 1.4172 P&G's WACC ($) = 9.600% euro-dollar interest rate = 4.000% per annum euro interest rate = 3.885% per annum eurodollar borrowing rate = 5.000% per annum euro borrowing rate = 5.000% per annum note: interest rates are per annum (which means per year), so you need to find the periodic interest rate for 90 days by multiplying the annual interest rate x 90/360 1. What would the result be if P&G chose to remain unhedged? Show how you arrived at your answer with numbers under three different scenarios for the future spot rate: same as current spot rate; what P&G's foreign exchange advisors believe; what the Credit Suisse forward rate says. Are these results certain or risky? 2. What would the result be if P&G chose to pursue a forward market hedge with Credit Suisse? Show how you arrived at your answer with numbers. Is this result certain or risky, why? 3. What would the result be if P&G chose to pursue a money market hedge? You can assume P&G would reinvest loan proceeds in operations, so use the company's WACC as the carry forward rate. Show how you arrived at your answer with numbers. Is this result certain or risky, why?

Answer rating: 100% (QA)

To determine the results of different hedging strategies for PG we need to calculate the outcomes under three scenarios same as the current spot rate ... View the full answer