Aspen Technology, Inc.: Currency Hedging Review

Problem: Aspen has a 500M 4-year contract with a Japanese licensee that will be paid in installments, 140M immediately, and then three annual payments of 140M. The case states that Aspen would hedge the first two installments with 1- and 2-year forwards, which based on Exhibit 6 can be hedged with forward prices of 94.68/$ and 90.15/$.

To use Yen forwards, does it or long or short?

How many USD can Aspen get in 1 and 2 years for its 140M if it hedges with Yen forwards?

For the 3rd installment the theoretical forward rate on Exhibit 6 is 86.60/$, but we are told it cannot get a counterparty to offer this, so it hedges with a 1-year forward, planning to roll this into another one-year forward, and then a final one year forward. This is how it works, you fill in details.

It uses a 1-year forward as in 1, but in 1-year it has no Yen yet, so it buys Yen in the market and sells into the forward. What is the USD g/l if in 1-year the spot exchange rate is 90/$? What is it if the spot exchange rate is 100 /S?

The g/l in 3 would in theory be rolled into the next forward (recall Amer. Barrick), but we ignore this and assume they just put it in the bank. At time 1, assume the spot is 100/$, and the new 1-year forward rate on the next forward is again 94.68/$, assuming rates havent changed. If spot exchange is again 100/$ at time 2, what is their second USD g/l? We again put it in the bank, and get a final one year forward with the same rate of 94.68/$.

Finally, at time 3 they receive the 140M and sell it into this last forward. What is the total USD they have received from all forwards, including the g/ls received at time 1 and time 2 (ignore that we would have interest adjustments on the g/ls). What is the implied exchange rate for this 3-year payment?

Conclusion: Unlike a 3-year forward, this final answer will depend on the actual exchange rates along the way (creating the g/ls) as well as the new 1-year forward prices along the way (reflecting interest rates).

Identify the cash flows of the 5% British pound bond (annual coupon) in , remembering that Carrefour wants to borrow 750M (Exhibit 7).

Convert these cash flows into Euro with forward contracts, using a generalized version of the forward rate formula above.

Whats the IRR of this bond?

If a 5-year, 5% Euro bond is available directly, which is the better deal?