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 $1,510,000.$ The current spot rate is $$\frac{1\mathrm{.}2217}{},$ the $90-$day forward rate is $$\frac{1\mathrm{.}2287}{}.$ 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 $$\frac{1\mathrm{.}1503}{}.$

a$.$ Evaluate the hedging alternatives for Chronos if Manny is right $($Case $1$: $$\frac{1\mathrm{.}1503}{})$ and if Manny is wrong $($Case $2$:$$\frac{1\mathrm{.}2639}{}).$ 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 $$\frac{1\mathrm{.}1503}{}.$

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.$)$