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Everything about the deal was acceptable to Malaysia Airlines and the Boeing Company in January 2 0 2 3 . The final negotiated price for
Everything about the deal was acceptable to Malaysia Airlines and the Boeing Company in January The final negotiated price for new jets in the series was $ million US Payment was expected upon delivery, scheduled for exactly twelve months later. As Malaysia Airlines CEO, Izham Ismail saw it there was one major concern: foreign exchange risk. A decision had to be made fast, due to the deteriorating condition of the airlines fleet. Covenants restricting the ability of Malaysia Airlines to take on new debt made it critical that Mr Ismail be sure about risk exposure before finalizing the deal. In the preceding five years, the value of the US dollar had increased to record levels against most international currencies, and the majority of analysts refused to guess when it would stop appreciating. The value of the Malaysian ringgit MYR per USD had changed from MYRUSD to MYRUSD on the scheduled day for signing the contract. This increase was at the front of the chairmans mind as he thought of ways to put together the US$ million payment in twelve months. At the current exchange rate of MYRUSD the deal would cost Malaysia Airlines MYR million. If the dollars appreciation continued to MYRUSD the deal could cost Malaysian Airlines an additional MYR million by the time payment was due. While many analysts predicted a continuing appreciation of the US dollar, several international banks said it was overvalued and that further increases would hurt many national economies especially the US Congressional leaders were hearing complaints about US exporters finding it increasingly difficult to compete in overseas markets, and the flood of inexpensive imported products was believed to have cost the country up to jobs. Representatives and Senators had therefore started mulling over trade protection measures and ways to reign in the dollars value. Mr Ismail believed that the value of the USD would start falling before the following January, perhaps from MYRUDS to between and MYRUSD But he was uncertain about when the depreciation would start; and if he made a wrong decision, his company could end up paying as high as MYRUSD by the following January. He therefore came up with several potential hedging strategies to manage the foreign transaction exposure. After considering his alternatives, Mr Ismail decided to use oneyear forward put option contracts to lock in the pricein MYR The contracts could affect the entire purchase price or just parts of the agreement. For example, a contract could be secured to lock in the entire purchase price, thus ensuring that he would get a guaranteed forward rate on the entire price in January On the other hand, Mr Ismail could seek a contract that would lock in the exchange rate on only a portion of the purchase price. He would then have to pay any remaining balance using the going exchange rate in January The airlines bank proposed that MYRUSD was a suitable strike rate on which to base the contract. Mr Ismail agreed with this rate and decided to purchase a put option contract ie the MYRUSD rate was guaranteed on only of the purchase price The banks fee for the contract was of the guaranteed amount. Using the formula function in EXCEL, calculate the overall cost of the put option strategy at exchange rates ranging from MYRUSD to MYRUSD at MYR increments.
Everything about the deal was acceptable to Malaysia Airlines and the Boeing Company in January The final negotiated price for new jets in the series was $ million US Payment was expected upon delivery, scheduled for exactly twelve months later. As Malaysia Airlines CEO, Izham Ismail saw it there was one major concern: foreign exchange risk. A decision had to be made fast, due to the deteriorating condition of the airlines fleet.
Covenants restricting the ability of Malaysia Airlines to take on new debt made it critical that Mr Ismail be sure about risk exposure before finalizing the deal.
In the preceding five years, the value of the US dollar had increased to record levels against most international currencies, and the majority of analysts refused to guess when it would stop appreciating. The value of the Malaysian ringgit MYR per USD had changed from MYRUSD to MYRUSD on the scheduled day for signing the contract. This increase was
at the front of the chairmans mind as he thought of ways to put together the US$ million payment in twelve months. At the current exchange rate of MYRUSD the deal would cost Malaysia Airlines MYR million. If the dollars appreciation continued to MYRUSD the deal could cost Malaysian Airlines an additional MYR million by the time payment was due.
While many analysts predicted a continuing appreciation of the US dollar, several international banks said it was overvalued and that further increases would hurt many national economies especially the US Congressional leaders were hearing complaints about US exporters finding it increasingly difficult to compete in overseas markets, and the flood of inexpensive imported products was believed to have cost the country up to jobs. Representatives and
Senators had therefore started mulling over trade protection measures and ways to reign in the dollars value.
Mr Ismail believed that the value of the USD would start falling before the following January, perhaps from MYRUDS to between and MYRUSD But he was uncertain about when the depreciation would start; and if he made a wrong decision, his company could end up paying as high as MYRUSD by the following January. He therefore came up with several potential hedging strategies to manage the foreign transaction exposure. After considering his alternatives, Mr Ismail decided to use oneyear forward put option contracts to lock in the pricein MYR The contracts could affect the entire purchase price or just parts of the agreement. For example, a contract could be secured to lock in the entire purchase price, thus ensuring that he would get a guaranteed forward rate on the entire price in January On the other hand, Mr
Ismail could seek a contract that would lock in the exchange rate on only a portion of the purchase price. He would then have to pay any remaining balance using the going exchange rate in January The airlines bank proposed that MYRUSD was a suitable strike rate on which to base the contract. Mr Ismail agreed with this rate and decided to purchase a put option contract ie the MYRUSD rate was guaranteed on only of the purchase
price The banks fee for the contract was of the guaranteed amount. Using the formula function in EXCEL, calculate the overall cost of the put option strategy at exchange rates ranging from MYRUSD to MYRUSD at
MYR increments.
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