ork Week 8 ork must be shown in order to receive credit. HEDGING RECEIVABLES A f
ID: 2823434 • Letter: O
Question
ork Week 8 ork must be shown in order to receive credit. HEDGING RECEIVABLES A firm will receive SF 200,000 in one year. Assume the US Forward rate on SF rate of SF is 5o 50.0 s0.50 $0.025 Put is available with exercise Premium for the put Premviam for the call is A) It the firm uses a money market hedge, how much will at receive (in USD) in 1 year? They wit receive SF, f they borrow SF now, they can use the receivobles to pay off the loan They will take the SF received from the loan, invest it in the us and the amount they have in 3 year is the amount the effectively receive on the payables 8) If the firm uses a forward hedge, how much will it receive lin USD) in 1 year? C) Now let's look at using options (use the data in the aboue table o wel the firm use a call or a put opsion? Premium EMective price for each SF $amount received n L r Prohability of tach if an option is used under for200,000 SF when Probability So Total amount expected if using options esed on the sbowe scenarios, how much would the fires expect to receve WITHOUT eo,000 without | Prob, weighted ased onExplanation / Answer
The Exchange Risk can be hedged by using the following strategies:
A.Money Market Hedge:
Borrow SF convert to $,invest $ ,repay SF loan with 1-yr receivables
Amount in SF$ borrowed at =SF 200000/(1+.4800)
=SF $ 135135.13
$ received from converting SF $ at spot rate =SF $ 135135.13 *$.48 per SF
=$64864
Since the interest rate in US is 6% for 1 Yr period.
$ accumulated after 1 year =$64864 *(1+.06)
=$68756.
There fore the amount receivables from money market hedge is $ 68756.
B.Forward Contract :
Calculation of the cash flows receivable from forward contract is as below:
The cash flow from receivables =Receivables in SF *1-year Forward Rate
=SF 200000*$.485/SF
=$97000
There fore the amount receivable from the foward contract is $97000
C.
Option Contract Scenario Spot Rate in 1-yr Premium /unit paid for the option Exercise option Received per unit after premium Total Dollars received from converting SF$ 200000 Probability Scenario 1 $0.48 $0.03 Yes $0.45 $90,000.00 30% Scenario 2 $0.50 $0.03 No $0.47 $94,000.00 60% Scenario 3 $0.54 $0.03 Yes $0.51 $102,000.00 10% Cash to be received ($90000*.3+$94000*.6+$102000*.1) $27000+$56400+$10200 $93,600 From the above it is interpreated that the cash flow highest is received in case of forward contract is highest which is $97000 D Calculating the cash flows if receivables are unhedged as follows: Cash Flow Receivables * Exchange Rate SF 200000*($.48*.3+$.5*.6+$.54*.1) $99,600 Since the unhedged cash flow position is less than the forward contract hedge of cash flow of $97000 the firm should hedge its receivables.Related Questions
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