Question
Mattel is a U.S.-based company whose sales are roughly two-thirds in dollars (Asia and the Americas) and one-third in euros (Europe). In September Mattel delivers
Mattel is a U.S.-based company whose sales are roughly two-thirds in dollars (Asia and the Americas) and one-third in euros (Europe). In September Mattel delivers a large shipment of toys (primarily Barbies and Hot Wheels) to a major distributor in Antwerp, Netherlands. The receivable 80 million, is due in 90 davs, standard terms for the toy industry in Europe. Mattel's treasury team has collected the following currency and market quotes.
The company's foreign exchange advisors believe the euro will be at about $1.4500/ in 90 days. Mattel's management does not use currency options in currency risk management activities.
Advise Mattel on which hedging alternative is probably preferable by responding to the questions below.
Current spot rate ($/) - $1.4158
Credit Suisse 90-day forward rate ($/) - $1.4172
Barclays 90-day forward rate (S/) - $1.4195
Mattel Toys WACC ($) - 9.600%
90-dav eurodollar interest rate - 4.000%
90-day euro interest rate - 3.885%
90-dav eurodollar borrowing rate - 5.000%
90-dav euro borrowing rate - 5.000%
Assumptions - Values
90-day A/R () - 80,000,000.00
Current spot rate ($/) - $1.4158
Credit Suisse 90-day forward rate (S/) - $1.4172
Barclays 90-day forward rate (S/) - $1.4195
Expected spot rate in 90 days ($/) - $1.4200
90-day Eurodollar interest rate - 4.000%
90-day euro interest rate - 3.885%
Implied 90-day forward rate (calculated, $/) - $1.4162
90-day Eurodollar borrowing rate - 5.000%
90-day euro borrowing rate - 5.000%
Mattel Toys weighted average cost of capital ($) - 9.600%
A) In anticipation of the receiving revenues in 90 days, what is the exposure of Mattel Toys?
B) Mattel Toys decided to use a money market hedge. Please follow the steps required for Mattel to contain future currency exposure and explain the outcome.
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