If 2
- 1. 103. You are planning to hedge a payables exposure in dollars and have collected the following information.<br />Spot : (Rs./$)42.50/42.60<br />3-month forward (Rs./$)43.50/43.70<br />Interest rate: $ - 6%<br />Rs. 15%<br />If the exposure will mature in 3 months and there are no restrictions on trading in forward/money market instruments, what cover would you prefer forward cover or money market cover? Show necessary calculations.<br />104. You were to import an equipment for your project and you have a choice to invoice in the following currencies:<br />Invoice Value贈 1,00,000S$ 2,90,000NKr 9,17,000Spot rate67.50/9023.25/407.05/151-m Forward rate25/4010/1520/252-m Forward rate50/90---------1-m Interest rate6.004.004.502-m Interest rate6.254.254.75<br />You have the option to pay at the end of 1st month or 2nd month along with interest at the applicable rates. However, the pay-out at the end of 2nd month has to be made in Euro and actual pay-out depends on how the rates are fixed with Euro. If the Rs./Euro is 47, after 2 months, compute the limits for S$/Euro and NKr/Euro rates that will make invoicing in S$ and NKr a better choice than 贈. Which currency do you select if you prefer to pay at the end of first month?<br />105. M/s. Windfall Ltd. has to import raw material in three consignments at the rate of one consignment every month in the next three months. Payments will have to be made at the end of each month. The company has the option to invoice the consignment either in US $ or Euro. The terms as under:<br />US $EuroTo be paid afterFirst Consignment1,50,0001,57,0001 monthSecond Consignment3,00,0003,12,0002 monthsThird Consignment2,50,0002,62,0003 months<br />You, as the Finance Manager of the company, have the following forecast for the exchange rates:<br />After 1 monthAfter 2 monthsAfter 3 monthsUS $/Euro1.0455/561.0418/091.0400/01Rs./US$43.25/3543.45/5843.75/85<br />The current forward quotes in the market are as under:<br />After 1 monthAfter 2 monthsAfter 3 monthsUS $/Euro1.0465/671.0426/291.0415/19Rs./US$43.45/5043.65/7543.80/95<br />Suggest the currency in which you invoice for each of the consignment.<br />If the exposure is hedged.
- 2. If the exposure is left uncovered.106. International Industries Ltd. (IIL), an Indian company, has a receivable of $ 1,000,000 maturing three months from now and a payable of 贈 1,500,000 maturing in six months. The company has decided to hedge the two separately. The following information is available regarding the same:<br />Exchange Rates<br />Rs./$Spot43.65/70<br />3-m forward44.75/85<br />6-m forward44.80/95<br />Rs./贈Spot70.25/50<br />3-m forward70.50/00<br />6-m forward71.15/80<br />Interest Rates (%)<br />Rs.$贈3-months9.00/9.504.00/4.255.00/5.256-months10.00/11.004.50/5.006.00/6.50<br />Advise the company on whether it should adopt a forward cover or a money market cover.<br />107. A to Z Pharma Inc., a US based company, has a receivable of C$ 1,000,000 maturing five months from now. The company is considering whether the exposure should be hedged through futures or a money market cover. Six-month futures on Canadian dollars are now trading at US$ 0.7205 and the current $/C$ rate is 0.7005. The interest rate for five-month investment in US$ is 6% p.a.<br />Calculate the inflow to the company if, after five months, the futures contract trades at 0.7185 and the spot $/C$ rate is 0.7100.
- 3. What should be the rate of interest on Canadian dollars if the company should be indifferent between the futures and money market cover?108. Amico, an American company imported machinery worth Euro 1 million on April 05, 2000, from a firm based in Switzerland. The payable is due in June. Amico is considering whether this exposure should be left open or hedged through forward or option market. The market rates obtained by Amico are:<br />$/Euro spot0.9580/0.9590<br />2-months forward20/30<br />July call options with a strike price of $ 0.9610/Euro are available at a premium of 0.005 $ per Euro.<br />You are required to:<br />Define the cash outflow for Amico if the exposure is left open, hedged through forward market and hedged through option market.
- 4. Find at what expected spot rate will Amico be indifferent between
- 5. Open position and forward hedge
- 6. Open position and hedge through call option
- 7. Forward hedge and hedge through call option109. Handex is an Indian firm exporting handicrafts to North America. All the exports are invoiced in US$. Handex is considering the use of money market or forward market to cover a receivable of $ 50,000 expected to be realized 3 months hence. Handex has the following information from its banker:<br />Exchange rates:Interest rates<br />Spot :Rs./$ : 43.65/44.00 3-m Rs. : 9%<br />3-m forward:Rs./$ : 43.95/44.40 3-m $ : 6%<br />Which option is better for Handex?
- 8. Assume that Handex anticipates the spot exchange rate 3-m hence to be equal to the current 3-m forward rate. After three months the spot exchange rate turned out to be Rs./$ : 44.00/44.42. what is the foreign exchange exposure and risk of Handex?110. an Indian Company has a payable of US $100,000 due in 3 months. The company is considering to cover the payable through the following alternatives:<br />Forward contract, and
- 10. Option.The following information is available with the company:<br />Exchange rate:<br />Spot Rs./$ 45.50/45.55<br />3-m forward40/45<br />3-m interest rate (%):<br />US4.5/5.0<br />India10.0/11.0<br />Call option on $ with a strike price of Rs. 46.00 is available at a premium of Rs. 0.10/$. Put option on $ with a strike price of Rs. 46.00 is available with a premium of Rs. 0.05/$.<br />Treasury department of the company forecasted the future spot rate after 3 months to be:<br />Spot rate after 3-mProbabilityRs. 45.60/$0.10Rs. 46.00/$0.60Rs. 46.40/$0.30<br />You are required to<br />Suggest the best alternative of hedging.
- 11. Explain why it is/it is not better to have the exposure unhedged.