Chronos Time Pieces of Boston exports watches to manycountries, selling in local currencies to stores and distributors. Chronos prides itself on being financially conservative. At least70% of each individual transaction exposure ishedged, mostly in the forwardmarket, but occasionally with options.Chronos' foreign exchange policy is such that the70% hedge may be increased up to a120% hedge if devaluation or depreciation appears imminent. Chronos has just shipped to its major North American distributor. It has issued a90-day invoice to its buyer for 1,550,000. The current spot rate is $1.2226/, the90-day forward rate is $1.2273/. Chronos' treasurer, MannyHernandez, 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 120days, possibly to around $1.1595/.

a. Evaluate the hedging alternatives for Chronos if Manny is right(Case 1: $1.1595/) and if Manny is wrong(Case 2: $1.2667/). What do yourecommend?

b. What does it mean to hedge120% of a transactionexposure?

c. What would be considered the most conservative transaction exposure management policy by afirm? How does Chronoscompare?

Mauna LoaMacadamia, a macadamia nut subsidiary ofHershey's with plantations on the slopes of its namesake volcano inHilo, Hawaii, exports macadamia nuts worldwide. The Japanese market is its biggest exportmarket, with average annual sales invoiced in yen to Japanese customers of 2,280,000,000. At the present exchange rate of 125/$, this is equivalent to $18,240,000. Sales are relatively equally distributed throughout the year. They show up as a 47,500,000 account receivable on MaunaLoa's balance sheet. Credit terms to each customer allow for 60 days before payment is due. Monthly cash collections are typically 190,000,000. Mauna Loa would like to hedge its yenreceipts, but it has too many customers and transactions to make it practical to sell each receivable forward. It does not want to use options because they are considered to be too expensive for this particular purpose.Therefore, they have decided to use a"matching" hedge by borrowing yen. Assume the annual interest rate on the loan is 5.50%.

a. How much should Mauna Loa borrow in U.S.dollars?

b. What should be the terms of payment on the yenloan?