Hedge a) Calculate the $/euro exchange rates for a 5% appreciation and depreciation of the euro in the top row. b) Finish filling in the second row; show how much in dollar terms the euro payable will be worth to your company given changes in the euro (note the sign). c) Enter (as a positive or negative) the number of futures contracts you plan to buy or sell to fully hedge your exposure in the euro. Ignoring interest from marking-to-market, fill the 3rd row with future values of these contracts (be careful). What will be your total future value (including the receivable) under each scenario given this transaction? Put that in the labeled row. d) Now construct a money-market hedge for this exposure. Your firm can borrow euro at 2%, or invest in SF at 1.5% annual rates. You can borrow US$ at 4% or invest in US$ at 3.5%. Again these are annually compounded annual rates. Describe exactly how you would construct a money-market hedge. Compare the money market hedge with the futures hedge you constructed in part (c), which one is a better deal for your company? 4) In order to answer the next question, you need to fill in future values in the following table. You are importing new coffee makers from Germany. You will have to pay 2 million euros for the next shipment in 90 days. The current spot price of the euro is 1.1735 $/euro, and the 90-day euro forward rate is 1.1737 S/SF. Note, euro futures and options are for 125,000 SF per contract. Future Values Table: 10% depreciation No Change in spot 10% appreciation in SF, SSF rates, S/SP - 95 In In SF, S/SF- 180 days Value of 8 million SF receivable Value of futures contracts Sum of futures plus receivable Value of (number and type) I options Sum of options plus receivable Money Market Hedge Hedge a) Calculate the $/euro exchange rates for a 5% appreciation and depreciation of the euro in the top row. b) Finish filling in the second row; show how much in dollar terms the euro payable will be worth to your company given changes in the euro (note the sign). c) Enter (as a positive or negative) the number of futures contracts you plan to buy or sell to fully hedge your exposure in the euro. Ignoring interest from marking-to-market, fill the 3rd row with future values of these contracts (be careful). What will be your total future value (including the receivable) under each scenario given this transaction? Put that in the labeled row. d) Now construct a money-market hedge for this exposure. Your firm can borrow euro at 2%, or invest in SF at 1.5% annual rates. You can borrow US$ at 4% or invest in US$ at 3.5%. Again these are annually compounded annual rates. Describe exactly how you would construct a money-market hedge. Compare the money market hedge with the futures hedge you constructed in part (c), which one is a better deal for your company? 4) In order to answer the next question, you need to fill in future values in the following table. You are importing new coffee makers from Germany. You will have to pay 2 million euros for the next shipment in 90 days. The current spot price of the euro is 1.1735 $/euro, and the 90-day euro forward rate is 1.1737 S/SF. Note, euro futures and options are for 125,000 SF per contract. Future Values Table: 10% depreciation No Change in spot 10% appreciation in SF, SSF rates, S/SP - 95 In In SF, S/SF- 180 days Value of 8 million SF receivable Value of futures contracts Sum of futures plus receivable Value of (number and type) I options Sum of options plus receivable Money Market Hedge