Question
(25 points) Let's consider a Belgiam manufacturing company Gemsworth, which engages in international business with Japan and currently has the following Japanese commitments: (a) A/R
(25 points) Let's consider a Belgiam manufacturing company Gemsworth, which engages in international business with Japan and currently has the following Japanese commitments:
(a) A/R of 300,000 for ninety days.
(b) A/P of 100,000 for thirty days.
(c) Sales contract (six months) of 100,000,000.
(d) A/R of 500,000 for thirty days.
(e) A deposit that at maturity, in twelve months, pays 5,000,000.
(f) A loan for which Grasshopper will owe 800,000 in half a year.
(g) A/P of 300,000 in three months.
(h) A/R of 100,000 for thirty days.
(i) A purchase contract for 500,000 for twelve months.
Questions:
- What is Grasshopper's net exposure for each maturity? (5 points)
(b) How would Grasshopper hedge the exposure for each maturity on the forward market? Each
forward contract can only have one specified maturity. (3 points)
(c) Assume that the compound per month interest rate is 0.5 percent. How would the company
hedge its exposure on the spot market and the money market? Describe all money-market
transactions in detail. (8 points)
(d) Your answer to (a) may involve exposures for maturity of different month. If so, how would
the company hedge all the exposures on the forward market if it is allowed to use one forward
contract only (again, a forward contract can only have one specified maturity)? Please give
details for each relevant maturity in consideration. (9 points)
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