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Hedging Exercise--Forwards and Futures

Hedging Exercise--Forwards and Futures - locking in 84.190...

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Click to edit Master subtitle style 4/22/11 Hedging Exercise Let’s work on it separately and then talk about what we did. BM 432 Hill
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4/22/11 Hedging the ¥ Your company plans to purchase a major piece of equipment from Japan on about March 1st, 2011 for the price of 50,000,000 ¥. What concerns do you have about this transaction? The information regarding spot and forward rates is given in the following table.
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4/22/11 USD/JPY Spot 84.19 84.21 USD/JPY 01W Forward -0.7900 -0.6400 USD/JPY 02W Forward -1.3200 -1.1200 USD/JPY 03W Forward -1.8200 -1.5700 USD/JPY 01M Forward -2.3000 -2.1000 USD/JPY 02M Forward -5.3500 -4.9500 USD/JPY 03M Forward -8.3200 -7.9200 USD/JPY 04M Forward -12.6000 -12.0000 USD/JPY 05M Forward -15.9500 -15.2500 USD/JPY 06M Forward -19.8000 -19.0000 Time Period Bid Ask Source: fxstreet.com (September 27, 2010) Which one do you use? Since you’re buying, the one that costs you the most! Which contract would you use? What FX rate
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Unformatted text preview: locking in? 84.190- 0.1595 83.030 5 4/22/11 Suppose March 1st Arrives • What happens? • What if the spot rate then is 85.00¥/ $? • What if the spot rate then is 83.00¥/ $? • What other mechanisms could you have used to hedge this transaction? 4/22/11 Futures Contract • Suppose you had decided to enter into a futures contract instead of a forward contract to hedge your purchase. – Assume: each contract is for 6.25MM¥ and that a contract for March delivery is priced at 83.95 ¥/$. – Do you buy or sell contracts? How many? Suppose the initial margin is 4/22/11 FX Option • Suppose a call option is available at a striking price of 84.20¥/$ for a price of $50 that lets you buy 5,000,000¥. • How many contracts? • Tell what you would do and what the cash costs would be if, near expiration, spot rate is 84.60 ¥/$? • If the spot rate is 84.00¥/$?...
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