Managing an account payable use a forward market

  • No School
  • AA 1
  • 109

This preview shows page 101 - 108 out of 109 pages.

Managing an Account Payable Use a forward market hedge – Trident could purchase a forward contract locking in the $1.754/£ rate ensuring that their obligation will not be more than $1,754,000 Use a money market hedge – this hedge is distinctly different for a payable than a receivable Here Trident would exchange US dollars at the spot rate and invest them for 90 days in pounds The pound obligation for Trident is now offset by a pound asset for Trident with matching maturity
Image of page 101
Managing an Account Payable Using a money market hedge To ensure that exactly £1,000,000 will be received in 3 months, discount the principal by 8% p.a. 6 £980,392.1 = 360 90 x 0.08 + 1 £1,000,000 .77 $1,729,411 $1.7640/£ x 6 £980,392.1 = This £980,392.16 would require $1,729,411.77 at the current spot rate
Image of page 102
Managing an Account Payable Using a money market hedge Finally, carry the cost forward 90 days using the cost of capital in order to compare the payout from the money market hedge 12 . 294 , 781 , 1 $ 360 90 x 12 . 0 1 x 77 . 411 , 729 , 1 $ This is higher than the forward hedge of $1,754,000 thus unattractive
Image of page 103
Managing an Account Payable Futures market hedge Trident could also cover the £1,000,000 exposure by buying futures contracts now at say $1.7540/£ If spot rate is $1.7600/£ then the result of futures position is: Value at maturity (Long position) = Notional principal (Spot – Futures) Value at maturity (Long position) = £1,000,000 ($1.7600/£ – $1.7540/£) Value at maturity (Long position) = $6,000 The gain on futures would reduce the value of payable Value of payable = –£1,000,000 $1.7600/£ = –$1,760,000 The net value of payable is: –$1,760,000 + $6,000 = –$1,754,000 Implied exchange rate of conversion is $1,754,000 / £1,000,000 = $1.7540/£ (Rate at which we bought futures contracts.
Image of page 104
N e t P r o c e e d s o f A l t e r n a t i v e s Cell E5 Entry is =IF(A5>$C$2,($C$2+$C$3)*$C$1,(A5+$C$3)*$C$1) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 A B C D E Exposure £1,000,000 Call Exercise 1.75 Call Premium 0.0273 (FV) Spot Rate Unhedged MM Forward Call Option 1.68 $1,680,000 $1,781,294 $1,754,000 $1,707,254 1.69 $1,690,000 $1,781,294 $1,754,000 $1,717,254 1.70 $1,700,000 $1,781,294 $1,754,000 $1,727,254 1.71 $1,710,000 $1,781,294 $1,754,000 $1,737,254 1.72 $1,720,000 $1,781,294 $1,754,000 $1,747,254 1.73 $1,730,000 $1,781,294 $1,754,000 $1,757,254 1.74 $1,740,000 $1,781,294 $1,754,000 $1,767,254 1.75 $1,750,000 $1,781,294 $1,754,000 $1,777,254 1.76 $1,760,000 $1,781,294 $1,754,000 $1,777,254 1.77 $1,770,000 $1,781,294 $1,754,000 $1,777,254 1.78 $1,780,000 $1,781,294 $1,754,000 $1,777,254 1.79 $1,790,000 $1,781,294 $1,754,000 $1,777,254 1.80 $1,800,000 $1,781,294 $1,754,000 $1,777,254 1.81 $1,810,000 $1,781,294 $1,754,000 $1,777,254 1.82 $1,820,000 $1,781,294 $1,754,000 $1,777,254 1.83 $1,830,000 $1,781,294 $1,754,000 $1,777,254 1.84 $1,840,000 $1,781,294 $1,754,000 $1,777,254 1.85 $1,850,000 $1,781,294 $1,754,000 $1,777,254 1.86 $1,860,000 $1,781,294 $1,754,000 $1,777,254 1.87 $1,870,000 $1,781,294 $1,754,000 $1,777,254 1.88 $1,880,000 $1,781,294 $1,754,000 $1,777,254 1.89 $1,890,000 $1,781,294 $1,754,000 $1,777,254 1.90 $1,900,000 $1,781,294 $1,754,000 $1,777,254
Image of page 105
Net Proceeds of Alternatives Hedging Alternatives $1,660,000 $1,680,000 $1,700,000 $1,720,000 $1,740,000 $1,760,000 $1,780,000 $1,800,000 $1,820,000 $1,840,000 $1,860,000 $1,880,000 $1,900,000 $1,920,000 1.68 1.69 1.70 1.71 1.72 1.73 1.74 1.75 1.76 1.77 1.78 1.79 1.80 1.81 1.82 1.83 1.84 1.85 1.86 1.87 1.88 1.89 1.90 Exchange Rate ($/£) Net Proceeds Unhedged MM Forward Call Option
Image of page 106
Risk Management in Practice Which Goals? The treasury function of most firms is usual considered a cost center; it is not expected to add to the bottom line However, in practice some firms’ treasuries have become aggressive in currency management and act as profit centers Which Exposures? Transaction exposures exist before they are actually booked yet some firms do not hedge this backlog exposure However, some firms are selectively hedging these backlog exposures and anticipated exposures Which Contractual Hedges?
Image of page 107
Image of page 108

You've reached the end of your free preview.

Want to read all 109 pages?

  • Fall '19
  • Trident

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask ( soon) You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors