536-4a_HW[1]

536-4a_HW[1] - 536-4a_HW, 11S FIN 536 SU Page 1 of 23 Topic...

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Unformatted text preview: 536-4a_HW, 11S FIN 536 SU Page 1 of 23 Topic 4 Manage Transaction Exposure HW Currency AR AP ES1 Unhedged, Forward Hedge, Money Market Hedge ES2 NT$ Unhedged, Forward Hedge, Money Market Hedge ES3 Unhedged, Forward Hedge, Money Market Hedge ES4 Unhedged, Forward Hedge, Money Market Hedge ES5 SF Synthetic Forward Hedge, Participating Forward Hedge ES6 SF Forward Hedge, Range Forward Hedge ES7 SF Forward Hedge, Range Forward Hedge ES8 Option Hedge, Participating Forward Hedge ES9 Option Hedge, Participating Forward Hedge ES10 All Strategies ES11 SF All Strategies SH1 Unhedged, Forward Hedge, Money Market Hedge SH2 NT$ Unhedged, Forward Hedge, Money Market Hedge SH3 Unhedged, Forward Hedge, Option Hedge SH4 Unhedged, Forward Hedge, Option Hedge SH5 All Strategies 536-4a_HW, 11S FIN 536 SU Page 2 of 23 Exam Sample Problem 11.HEDGE BY FORWARD AND MONEY MARKETSuppose your firm has an AR of 20 Million due in 3 months. You are asked to evaluate the following different hedging alternatives. Strategy X: Remain unhedged Strategy Y: Forward (Future) hedging Strategy Z: Money market hedging The following information is available: FX market S=1.0600 $/, F3=1.0580 $/ from Credit Suisse (CS), F3=1.0560 $/ from Barclays, E(S3)=1.03 $/ Money market 3-month Borrowing: r= 8.4%, r$= 7.6% 3-month Deposit: r= 7%, r$= 6% WACC 10% a)Prepare the required market data for analysis: b)Strategy X: Remain unhedged. i)What is the value profile of the unhedged AR in 3 months? ii)What is the $ value of the AR if S = 1.1 $/ in 3 months? c)Strategy Y: Forward hedge. i)At T =0, how do you use forward contract to hedge AR? ii)What is the value profile of the hedged AR in 3 months? Which bank will you choose? iii)What is the $ value of the AR if S = 1.1 $/ in 3 months? d)Strategy Z: Money market hedge. i)How do you use money market to hedge this AR? Specify each step.Assume the company can use additional cash to invest in a project, what is the value profile of the hedged AR in 3 months? ii)What is the $ value of the AR if S = 1.1 $/ in 3 months? iii)Compare Strategy Y&Z, which is better? iv)Plot the value profile of the best hedging strategy and Strategy X on the same graph. What is the BE point between these two strategies? Briefly explain the difference between these two strategies. Exam Sample Problem 1 Solution a)Prepare the required market data for analysis: Periodic rate FX market S=1.0600 $/, F3=1.0580 $/ from Credit Suisse (CS), F3=1.0560 $/ from Barclays, E(S3)=1.03 $/ Money market 3-month Borrowing: r= 2.1%, r$= 1.9% 3-month Deposit: r= 1.75%, r$= 1.5% WACC 2.5% b)Strategy X: Unhedged i)Receive $ (20,000,000*S), where S=$/; ii)Receive $22M....
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536-4a_HW[1] - 536-4a_HW, 11S FIN 536 SU Page 1 of 23 Topic...

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