Transactions include coverage of remittances of dividends, the exposure of the
investment portfolio and strategic economic competitiveness. Market quotes are
provided for options (and options for coverage rates), forward and interest rates for
The case introduces us to the principles of the currency options market and
hedging strategies. The transactions are of various types that are often faced by
companies that are involved in extensive international business or multinational
corporations. The case is aimed to acquire practical experience in the treatment of
specific exposure and coverage concerns, including how to apply various market
events, that the hedging strategy is right, and how to deal with exposure foreign
currency through cross-hedging policy.
Below I present solutions to the problems presented in the textbook:
1. The company expects to DM100 million in repatriated profits, and do not want
the DM / $ exchange rate to convert those earnings to rise above 1.70. You can
cover this exposure DM put options at a price of 1.70. If the spot exchange rate
rises above 1.70, which can exercise the option, whereas if the rate falls you can
enjoy the additional benefits of favorable exchange rates.
To purchase options that require an upfront premium of:
100,000,000 x 0.0164 = DM 1.64 million DM.
With a price of 1.70 DM / $, this would ensure the U.S. company receiving at least:
DM 100,000,000 - DM 1,640,000 x (1 + 0.085106 x 272/360)
DM = 98254544 / 1.70 DM / $ = $ 57,796,791
through the exercise of the option if the DM depreciated. Note that the product of
the repatriated earnings are reduced by the premium paid, which is adjusted by the
expected interest on this amount.
However, if the DM appreciates against the dollar, the company will allow the
option to expire, and enjoy greater earnings in dollars of this increase.
They should send the contracts used to hedge this risk, the funds received would
DM100, 000 000 / 1.6725 DM / $ = $ 59,790,732,
regardless of movement of the exchange rate DM / $. While this amount is almost
$ 2 million more than was realized with the coverage of the above, there is
flexibility as to the exercise date, whichever is different from that in which the
repatriated profits are available, the company can be exposed to other more
current exposure. Furthermore, there is a chance to enjoy any appreciation in the