Devising Hedging Strategies

The Assignment

You are a member of Chase Options, Inc., who was asked to participate in designing hedging strategies for the following transactions:

' Anticipated Currency Transactions

1.) A U.S. company expects DM 100 million in repatriated profits from its German subsidiary on March 20, 1991. The company believes that the dollar has reached a long-term low at the current level DM/$1.6700; however, it doesn't want to lock in a forward exchange contract because of uncertainty concerning the impact of the German reunification on the currency market. The company doesn't want to exchange at greater than DM/$1.7000 (e.g., 1.7200). Design a hedging strategy by using currency options and utilizing the rates available in Table 1 (Row 1). Examine the implications of hedging instead with a forward contract.

2.) A U.S. firm has bought industrial equipment from a U.K. firm for 5 million payable in 60 days. The firm believes that U.K.'s political and economic uncertainty might drive the pound sterling down significantly. Design a hedging strategy for the corporation by employing either forward currency contracts or currency options and utilizing the data listed in Table 1 (Row 3).