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 occasionally with options. Chronos' 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 1,780,000. The current spot rate is $1.2221/, the 90-day forward rate is $1.2282/. Chronos' treasurer, Manny Hernandez, has a very good track record in predicting exchange rate movements. He currently believes the euro will weaken against the dollar in the coming 90 to 120 days, possibly to around $1.1638/. a. Evaluate the hedging alternatives for Chronos if Manny is right (Case 1: $1.1638/) and if Manny is wrong (Case 2: $1.2556 / ). What do you recommend? b. What does it mean to hedge 120% of a transaction exposure? c. What would be considered the most conservative transaction exposure management policy by a firm? How does Chronos compare? a. Case 1: Manny is right and the spot rate in 90 days is $1.1638/. How much in U.S. dollars will Chronos receive in 90 days if 100% of the transaction exposure is hedged with the forward contract? (Round to the nearest dollar.) How much in U.S. dollars will Chronos receive in 90 days if 70% of the transaction exposure is hedged with the forward contract? $ (Round to the nearest dollar.) How much in U.S. dollars will Chronos receive in 90 days if 120% of the transaction exposure is hedged with the forward contract? $ (Round to the nearest dollar.) Case 2: Manny is wrong and the spot rate in 90 days is $1.2556/. How much in U.S. dollars will Chronos receive in 90 days if 100% of the transaction exposure is hedged with the forward contract? $ (Round to the nearest dollar.) How much in U.S. dollars will Chronos receive in 90 days if 70% of the transaction exposure is hedged with the forward contract? $ (Round to the nearest dollar.) How much in U.S. dollars will Chronos receive in 90 days if 120% of the transaction exposure is hedged with the forward contract? $ (Round to the nearest dollar.) If the value of the foreign currency is expected to depreciate, the will yield the greatest dollar value for the accounts receivable, while if the value of the foreign currency is expected to appreciate, the will yield the greatest dollar value for the accounts receivable. (Select from the drop-down menus.) b. What would be considered the most conservative transaction exposure management policy by a firm? How does Chronos compare? "A full (100%) hedge is the most conservative hedging policy. Any time a firm may choose to leave any proportion uncovered or purchase cover for more than the exposure (therefore creating a net short position), the firm could experience nearly unlimited losses or gains." The statement above is (Select from the drop-down menu.)
