12. Chronos Time Pieces. Chronos Time Pieces of Boston exports watches to many countries, selling in local currencies to stores and distributors. Chronos prides itself on being financially conservative. At least 70% of each individual transaction exposure is hedged, mostly in the forward market, but occasion- ally with options. Chronos's foreign exchange policy is such that the 70% hedge may be increased up to a 120% hedge if devaluation or depreciation appears imminent. Chronos has just shipped to its major North American distributor. It has issued a 90-day invoice to its buyer for 1,560,000. The current spot rate is $1.2224/, the 90-day forward rate is $1.2270/. Chronos's treasurer, Manny Hernandez, has a very good track record in predicting exchange rate move- ments. Currently he believes the euro will weaken against the dollar in the coming 90 to 120 days, pos- sibly to around $1.16/.

a. Evaluate the hedging alternatives for Chronos if Manny is right (Case # 1: $1.16/) and if Manny was wrong (Case #2: $1.26/). What do you rec- ommend?

b. What does it mean to hedge 120% of a transac- tion exposure?

c. What would be considered the most conservative transaction exposure management policy by a firm? How does Chronos compare?