This question also connects with the FXstreet forecasts and the hedging decision depends on the number of
Question:
This question also connects with the FXstreet forecasts and the hedging decision depends on the number of analysts projecting an adverse movement. If ALL analysts think the foreign currency is going up, then you want to hedge the lowest amount possible of the receivables, which is 25% If the forecasts suggest the foreign currency is going down, then you will definitely want to hedge 100% of the exposure. You can vary your amount to hedge based on the number (%) of analysts expecting an adverse movement. Select the hedging level and calculate the profit/loss for each hedging technique. Compare to the unhedged position (no hedge case) and determine what strategy was the best.
Question - Which alternative was best in this case? Was your forecast useful?
Pair movement that hurts us | Down | ||||
# analysts expecting such movement | 2 | Amount to leave unhedged | 750,000 | ||
# forecasts avaiable | 10 | Amount to hedge | 250,000 | ||
Percentage to hedge | 25% | ||||
Amount received if left unhedged | $ 1,144,600 | ||||
Unhedged revenue | Hedged revenue | Total | P/L | ||
Forward hedge | $ 858,450 | $ 289,089.25 | $ 1,147,539 | -2,939 | |
Future hedge | $ 292,280.00 | $ 1,150,730 | -6,130 | ||
Put options hedge (ITM) | $ 283,572.14 | $ 1,142,022 | 2,578 | ||
Put options hedge (ATM) | $ 284,096.01 | $ 1,142,546 | 2,054 | ||
Put options hedge (OTM) | $ 284,945.39 | $ 1,143,395 | 1,205 | ||
Money market hedge | $ 216,122.27 | $ 1,074,572 | 70,028 | Highest value created |
Management of Organizational Behavior
ISBN: 978-0132556408
10th edition
Authors: Paul Hersey, Kenneth H. Blanchard, Dewey E. Johnson