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Biopharmaceutical New Technologies (BioNTech) is a German based biotechnology company pioneering in novel therapies for cancer and other serious diseases. BioNTech, together with Pfizer of U.S., has successfully developed the RNA vaccine for preventing COVID-19 infections, which claims to offer a relatively high efficacy compares to others. This has led to a surge of orders for the vaccine from all around the world, including the U.K., Canada, Japan, Saudi Arabia, Hong Kong, Singapore, U.S. and Malaysia.

Amidst the turbulent foreign exchange market performances arising from the pandemic, BioNTech is extremely cautious with its cash flow positions. Thus, BioNTech is pressed to monitor its foreign currency obligations closely to ensure its liquidity position stays healthy. After much deliberation, the firm concludes that the most appropriate approach is to hedge those transactions that due in the farthest month.

To date, BioNTech has identified the following outstanding cash obligations which are substantial in value in U.S. dollar ($) and Euro ():

Sale of liquid concentration, due in six months $62,300,000

Purchase of hydrochloric acid, due in nine months $48,800,000

Purchase of aluminium foil and paper boards, due in nine months 32,000,000

Sale of Type 1 adaptive immune responses, due in nine months $53,600,000

Sale of Type 2 adaptive immune responses, due in six months 57,000,000

Purchase of paracetamol powder, due in nine months $32,000,000

Deutsche Bank, whom BioNTech has a long-standing relationship with agrees to sell $ at 0.8200 and buy $ at 0.8000 at present whilst the nine-month forward rates for the euro is at 2% premium against the dollar. BioNTech is also allowed to borrow short term at 2% above the banks base rate or invest short term at the base rate in either the Europe or U.S.

Current bank base rates for 270-days (%)

Europe 1 U.S. 3

BioNTech can buy a 9-month call option on at an exercise price of $1.3000 with 2.5% premium and a 9-month put option on at an exercise price of $1.2500 with a 1.5% premium. Assume BioNTechs cost of capital is 20% per annum, and has no cash surplus with no intention to change its capital mix. Assume also 30 days in a month and 360 days in a year.

(a) Determine the current spot and the nine-month forward rates between the $ and respectively.

(b) Devise a hedge strategy to BioNTech with forward and determine the hedged value.

(c) Devise a hedge strategy to BioNTech with money market and determine the hedged value.

(d) Devise a hedge strategy to BioNTech with the available option and determine the hedged value.

(e) Which is the best hedge strategy to BioNTech? Why?

(f) If BioNTech wishes to take natural hedge approach for its remaining foreign obligations, suggest TWO (2) approaches that BioNTech may take. (