FIN 435 Lecture Notes - Lecture 7: Spot Contract, Money Market, Forward Market
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Question: As a manager of a U.S. domestic company, you are c...
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As a manager of a U.S. domestic company, you are concerned about foreign currency exposure of your firmâs sales to the United Kingdom. You currently export $10 million of products to the United Kingdom annually and receive payment in pounds sterling. You send two large shipments each year valued at $5 million each. The invoice carriers net 90-day terms. Thus, from the invoice date, your company is exposed to currency exchange risk for a period of 90 days.
You are considering the possibility of using futures, options, or futures options as possible hedging tools. Your broker recently sent you the following data on the various hedging contracts available for your June 1 invoice with payments due September 1.
Current exchange rate (June 1) $1.67 per pound
Assumed spot exchange rate on September 1 is $2.00
$90-day forward rate as of June 1: $1.65
Options (31,250) | ||
Striking price | June 1, September Call Premium | Call Premium September 1 |
165.0 | 4.35 | 35.00 |
170.0 | 2.40 | 30.00 |
175 | 1.20 | 25.00 |
Future options (62,500) | ||
Striking price | June 1, September Call Premium | Call Premium September 1 |
1650 | 4.12 | 33.00 |
1700 | 2.20 | 27.00 |
1750 | 1.06 | 22.00 |
Future (62,500) | ||
June 1 Settle | September 1 Settle | |
September | 1.6496 | 2.055 |
a. Assume you donât hedge. Calculate the dollar loss occurring from the change in exchange rates from June 1 to September 1.
b. Assume you hedge with an options contract. Calculate the net result from the change in the exchange rates from June 1 to September 1. Assume commission fees equal $60.
c. Assume you hedge with a futures option contract. Calculate the net result from the change in the exchange rate from June 1 to September 1. Assume commission fees equal $60.
d. Assume you hedge with a futures contract. Calculate the net result from the hedge assuming that the margin for one contract is $1,000 and roundtrip commission fees equal $60.
e. Assume you enter into a 90-day forward rate agreement. Calculate the net result from the hedge assuming that the fee for the agreement is $150.