Today is November 25, 2022. Easton, a U.S. company, exports baseball equipment to Taiwan. Easton expects...

 

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Today is November 25, 2022. Easton, a U.S. company, exports baseball equipment to Taiwan. Easton expects to receive a payment of TWD 300 million on March 25, 2023, say, a 4-month maturity for the payment (TWD: Taiwanese Dollar). Easton decides to hedge this exposure using a March forward contract, which expires on March 25, 2023. The 4-month Taiwanese annualized interest rate is 1.2%, while the 4-month U.S. annualized interest rate is 3.3%. On November 25, the spot exchange rate is 31.890 in USDTWD, and the forward matured on March 25, 2023, trades at 31.720 today in USDTWD. (A) Use the information given in the Excel output table as below (based on 20 years of 4-month changes) to calculate the VaR associated with Easton's open position (use a 97.5% single-tailed level of confidence, or z = 1.96). (15 points) (B) Calculate the amount to be received on March 25, 2023, using a forward hedge. (5 points) (C) Calculate the amount to be received on March 25, 2023, using a money market hedge. (6 points) (D) Compared with the results for forward hedge and money market hedge, which strategy is better in this case? (2 points) Notes: Data is in terms of "USDTWD," but the question is in terms of USD-i.e., the USD is the domestic currency. • DATA The information below is based on 4-month percentage changes from 2002:1 to 2021:12. 4-mo% change USDTWD Mean Standard Error Median Mode Standard Deviation Kurtosis Skewness Minimum Maximum Sum Count -1.99% 0.2784% -1.60% 3.16% 0.712128 -0.34207 -9.364% 7.2586% -9.102 60 Today is November 25, 2022. Easton, a U.S. company, exports baseball equipment to Taiwan. Easton expects to receive a payment of TWD 300 million on March 25, 2023, say, a 4-month maturity for the payment (TWD: Taiwanese Dollar). Easton decides to hedge this exposure using a March forward contract, which expires on March 25, 2023. The 4-month Taiwanese annualized interest rate is 1.2%, while the 4-month U.S. annualized interest rate is 3.3%. On November 25, the spot exchange rate is 31.890 in USDTWD, and the forward matured on March 25, 2023, trades at 31.720 today in USDTWD. (A) Use the information given in the Excel output table as below (based on 20 years of 4-month changes) to calculate the VaR associated with Easton's open position (use a 97.5% single-tailed level of confidence, or z = 1.96). (15 points) (B) Calculate the amount to be received on March 25, 2023, using a forward hedge. (5 points) (C) Calculate the amount to be received on March 25, 2023, using a money market hedge. (6 points) (D) Compared with the results for forward hedge and money market hedge, which strategy is better in this case? (2 points) Notes: Data is in terms of "USDTWD," but the question is in terms of USD-i.e., the USD is the domestic currency. • DATA The information below is based on 4-month percentage changes from 2002:1 to 2021:12. 4-mo% change USDTWD Mean Standard Error Median Mode Standard Deviation Kurtosis Skewness Minimum Maximum Sum Count -1.99% 0.2784% -1.60% 3.16% 0.712128 -0.34207 -9.364% 7.2586% -9.102 60

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