It is Sunday afternoon, Feb 14, 2021. You, Assistant Treasurer, are thinking about how to hedge against foreign exchange fluctuations.

You have two things to take care of: Dividend & Upcoming payment.

• Dividend is due on December 15th, 2021. The dividend is from your subsidiary company in

  Germany. The amount is 2,000,000, considered as receivables.

• Upcoming payment to your supplier in Japan. The current trend is that Yen is around 78

  and increasing. The price per unit is 6,000. And, you agreed to buy 200,000 units. The

  th payment is due on September 10 , 2021.

• When your company borrow in the EURO currency, it typically borrows at LIBOR + 1%

• When your company lend in the EURO currency, it typically lends at LIBID

• Use the following tables to assess alternative ways of hedging.

a) EURO receivable (Dividend) in 305 days (Total 15 points): i) Collect information:

(1) Spot rate & Forward exchange rate (0.5 points)

(2) Interest rate (0.5 points)

(a) USD interest rate: BID & ASK

(b) EURO interest rate: BID & ASK

3) Put option: Strike & Premium (0.5 points)

i) Hedging methods

(1) Forward hedge (2.5 points)

(2) Money market hedge (2.5 points)

(3) Option hedge (2.5 points)

iii) Analysis

(b) Explain the hedge that you prefer (1.5 points)

(1) Which one do you prefer and why?

(a) Draw Graphs for hedging methods (4 points)

Forward hedge graph, Money market hedge graph, & Option hedge graph

b) YEN payable in 209 days (Total 15 points): i) Collect information:

(1) Spot rate & Forward exchange rate (0.5 points)

(2) Interest rate (0.5 points)

(a) USD interest rate: BID & ASK

(b) YEN interest rate: BID & ASK

(3) Call option: Strike & Premium (0.5 points

ii) Hedging methods

(1) Forward hedge (2.5 points)

(2) Money market hedge (2.5 points)

(3) Option hedge (2.5 points)

iii) Analysis

(a) Draw Graphs for hedging methods (4 points)

Forward hedge graph, Money market hedge graph, & Option hedge graph

(b) Explain the hedge that you prefer (1.5 points)