Research - International Finance Instructor: Dr. Tim Truitt...

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International Finance Instructor: Dr. Tim Truitt Student: Alan Fernando Montes de Oca Noriega Group Project: Research Toluca, Estado de México at Octuber 09th, 2011. This case examines currency markets and coverage options. International transactions present various options that require foreign exchange hedging strategies of companies involved. Seven operations in a variety of circumstances presented require coverage of currency options.
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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 different maturities. 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 be: 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 DM.
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If the company were to buy DM places like the former, and sell an equivalent amount of calls with strike price 1647, the premium paid would be exactly offset by
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Research - International Finance Instructor: Dr. Tim Truitt...

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