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

1,620,000. The current spot rate is $1.2211/, the 90-day forward rate is $1.2289/.

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 $1.1545/.

a. Evaluate the hedging alternatives for Chronos if Manny is right (Case 1: $1.1545/) and if Manny is wrong (Case 2: $1.2649/). 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 $1.1545/euro.

1. 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.)

2. 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.)

3. 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 $1.2649 /euro