F. Mayer Imports: Hedging Foreign Currency Risk.

Draw a payoff diagram for each three solutions and recommend the best solution.

For the exclusive use of H. Lee, 2023. Page 8 9B17N004 EXHIBIT 3: THE E-MAIL PROPOSAL September 16, 2014 Hi Mr. Goode On your request, please see the following indicative pricing on some AUD/EUR FX hedging solutions: All pricing is indicative and based off spot AUD/EUR 0.6980. The four (4) month FEC (Foreign Exchange Forward contract) is 0.6910 (spot of 0.6980 less 70 forward points). Solution 1-Purchase an AUD Put/EUR Call Option Expiry Date: 2015-01-14 (four months) Value Date 2015-01-16 Strike 1:0.6910 (at-the-money fwd) Strike 2:0.6860 (50 pips out-of-the-money (OTM)) Premium 1 2.13% of AUD face value (~146 AUD/EUR pips) Premium 2: 1.81% of AUD face value (~124 AUD/EUR pips) This solution gives you the right but not the obligation to buy EUR and sell AUD at the strike rate on the expiry date. On the expiry date, if the prevailing spot AUD/EUR is below the strike rate, then you will exercise the right to deal at the higher strike rate. Conversely, if the prevailing spot AUD/EUR rate is higher than the strike rate, then you will let the option lapse and buy EUR against the AUD in the spot market at the higher rate. I have provided you with two prices so you can see the relationship between premium and strike prices. Solution 2-AUD/EUR Collar Option-Buy an AUD Put/EUR Call and Sell an AUD Call/EUR Put-Zero Premium Expiry Date: 2015-01-14 (four months) Value Date: 2015-01-16 B Put Strike: 0.6860 (50 pips below the FEC) S Call Strike: 0.6942 B Put Strike: 0.6810 (100 pips below the FEC) S Call Strike: 0.6983 This solution locks you into a range whereby you have a worst-case rate (bought put strike) and the capacity to participate in favourable AUD/EUR movements up to the sold call strike. Ideally, the worst-case rate would be your budget rate. I have provided you with indicative pricing on two collar structures so that you can compare two different ranges. Remember, a collar structure is an alternative to an FEC; therefore, when assessing participation benefits, use the FEC rate as the benchmark, not the spot rate. Solution 3-AUD/EUR Knock-In Forward-Buy an AUD Put/EUR Call and Sell an AUD Call/EUR Put with Up-and-In Trigger-Zero Premium Expiry Date: 2015-01-14 (four months) Value Date: 2015-01-16 B Put Strike: 0.6890 (20 pips below the FEC) S Call Strike: 0.6890 with up-and-in knock-in trigger at 0.7140 With this structure, your worst-case rate is 0.6890 (20 pips below the FEC). When the option starts, you only have a bought AUD put option with a strike of 0.6890. However, if 0.7140 trades at any time between the option start and expiry date, then you are "knocked in" to a sold AUD call option with a strike of 0.6890. Having a bought AUD put and sold AUD call option with the same strike creates a synthetic forward. So, in layman's terms, this structure gives you a worst-case rate that is 20 pips worse than the FEC; however, you have the opportunity to participate in the AUD/EUR all the way to the trigger rate of 0.7140. If 0.7140 does trade during the life of the option, then you have to deal at the common strike rate of 0.6890. Source: Company documents. This document is authorized for use only by Hyojae Lee in International Finance taught by Jongik Chang, Korea University Business School from Feb 2023 to Jul 2023