5. (50) Today's date: December 1, 2020 You work at the Treasury department of GE and oversee GE's FX risk management. Suppose GE has an account receivable of 7,254,300 Australian dollar (AD) due on December 21, 2020, 20 days from now. You are concerned with the potential decline in AD value vs. S and want to hedge the position. The research department has provided following data to assist you with your hedging decision Currency Options available from the Philadelphia Stock Exchange Type Exercise price Premium Maturity date Call US$0.7800 US$0.015 per AD 12/21/2020 Put US$0.7720 US$0.034 per AD 12/21/2020 Annual money marker interest rates Rates U.S. Australia Borrowing 5.82% 5.20% Deposit 1.90% 1.64% In addition, the following are the actual and expected spot and futures prices for December 1, 2020 and December 21, 2020. Prices Actual rates on 12/1/2020 Assume actual rares on 12/21/2020 Spot exchange rate USSO.7528 US$0.7682 January 2021 futures price (settlement price) US$0.7598 US$0.7726 2) IfGE's objective is to obtain 100% hedging, should GE hedge with futures contracts? Using the data provided in the previous page, list and explain two main reasons. Be specific. Simple stating "Yes" or "No" is not enough. 3) On December 1, 2020, will GE "buy" or "sell" futures contracts? Using the data provided in the previous page, provide a numerical explanation why GE will either "buy" or "sell" futures contracts on December 1, 2020. Simply stating "buy" or "sell" is not sufficient. 4) As explained in the previous page, on December 1, GE and PNC entered a forward contract that matures on December 21, 2020. Did PNC experience an opportunity cost by entering the forward contract with GE on December 1, 2020? If yes, calculate the actual opportunity cost and show all your calculations. If not, provide an explanation. Simply stating "Yes" or "No" is not enough. 5) Find the spot exchange rate on December 21, 2020 that will leave GE indifferent between money market hedging and currency option hedging strategy. Show all your calculations. 5. (50) Today's date: December 1, 2020 You work at the Treasury department of GE and oversee GE's FX risk management. Suppose GE has an account receivable of 7,254,300 Australian dollar (AD) due on December 21, 2020, 20 days from now. You are concerned with the potential decline in AD value vs. S and want to hedge the position. The research department has provided following data to assist you with your hedging decision Currency Options available from the Philadelphia Stock Exchange Type Exercise price Premium Maturity date Call US$0.7800 US$0.015 per AD 12/21/2020 Put US$0.7720 US$0.034 per AD 12/21/2020 Annual money marker interest rates Rates U.S. Australia Borrowing 5.82% 5.20% Deposit 1.90% 1.64% In addition, the following are the actual and expected spot and futures prices for December 1, 2020 and December 21, 2020. Prices Actual rates on 12/1/2020 Assume actual rares on 12/21/2020 Spot exchange rate USSO.7528 US$0.7682 January 2021 futures price (settlement price) US$0.7598 US$0.7726 2) IfGE's objective is to obtain 100% hedging, should GE hedge with futures contracts? Using the data provided in the previous page, list and explain two main reasons. Be specific. Simple stating "Yes" or "No" is not enough. 3) On December 1, 2020, will GE "buy" or "sell" futures contracts? Using the data provided in the previous page, provide a numerical explanation why GE will either "buy" or "sell" futures contracts on December 1, 2020. Simply stating "buy" or "sell" is not sufficient. 4) As explained in the previous page, on December 1, GE and PNC entered a forward contract that matures on December 21, 2020. Did PNC experience an opportunity cost by entering the forward contract with GE on December 1, 2020? If yes, calculate the actual opportunity cost and show all your calculations. If not, provide an explanation. Simply stating "Yes" or "No" is not enough. 5) Find the spot exchange rate on December 21, 2020 that will leave GE indifferent between money market hedging and currency option hedging strategy. Show all your calculations
