QUESTION 1
Compare the forward quotes, money market hedges and options with each other to determine the best exchange rate hedge for France (Complete Table 5 on the separate answer sheet)
QUESTION 2
Calculate the exchange rates that will apply if the money market hedges are used for the export to Canada (Complete Table 6 on the separate answer sheet)
Considering the calculations you have done so far, you need to attend to a number of import transactions for goods that companies in the United States expressed interest in. The first transaction is for the import of good quality wines from France, since a retail liquor trading chain customer in the United States, for who you have been doing imports over the past five years has a very large order this time. The producer in France informed you that the current cost of the wine that you want to import is and 2,500,000. The producer in France will only ship goods in three months' time due to seasonal differences but payment will have to be conducted six months from now. The second transaction is for the export of 3d printers manufactured in the U.S.A. The country where it will be exported to is Canada. The payment of CAD 2,500,000 for the export to Canada will be received twelve months from now. You consider different transaction hedges, namely forwards, options and money market hedges. You are provided with the following quotes from your bank, which is an international bank with branches in all the countries: Forward rates: Currencies Spot 3 month (90 days) 1.14743 6 month (180 days) 1.15354 0.77475 9 month (270 days) 1.15969 12 month (360 days) 1.16587 $/ 1.141 34 $/CAD 0.76465 0.76559 0.76748 0.76843 Bank applies 360 day-count convention to all currencies (for this assignment apply 360 days in all calculations). Annual borrowing and investment rates for your company: Country 3 month rates Borrow Invest 6 months rates Borrow Invest 9 month rates Borrow Invest 12 month rates Borrow Invest United States Europe Canada 2.687% 0.505% 2.177% 2.554% 0.480% 2.069% 2.713% 0.510% 2.198% 2.580% 0.485% 2.090% 2.740% 0.515% 2.220% 2.607% 0.490% 2.112% 2.766% 0.5 20% 2.241% 2.633% 0.495% 2.133% Bank applies 360 day-count convention to all currencies. Explanation - e.g. 3 month borrowing rate on $ = 2.687%. This is the annual borrowing rate for 3 months. If you only borrow for 3 months the interest rate is actually 2.687%/4 = 0.67175% (always round to 5 decimals when you do calculations). Furthermore, note that these are the rates at which your company borrows and invests. The rates are not borrowing and investment rates from a bank perspective. Option prices: Currencies 3 month options 6 month options Call option Put option Call option Put option Strike Premium Strike Premium Strike Premium Strike Premium in $ in $ in $ in $ $/ $1.14399 $0.00174 $1.15088 $0.00174 $1.15010 $0.00173 $1.15702 $0.00152 $/CAD $0.76292 $0.00392 $0.76828 $0.00392 $0.77205 $0.00387 $0.77747 $0.00387 Bank applies 360 day-count convention to all currencies. (Students also have to apply 360 days in all calculations). Option premium calculations should include time value calculations based on US $ annual borrowing interest rates for applicable time periods e.g. 3 month $ option premium is subject to 2.687%/4 interest rate.) Table 5: France: Exchange rate hedges compared: (3 marks) Forward rate Money market hedge locked in exchange rate $/ Option hedge breakeven exchange rate Which hedging technique should be applied? (3 marks) Table 6: Canada export with money market hedge: (8 marks) PV of foreign currency to be borrowed Converted at $ amount with spot to $ for interest investment invested Exchange rate locked in with transaction Show answers in this row: Show your workings in the columns below the answers Considering the calculations you have done so far, you need to attend to a number of import transactions for goods that companies in the United States expressed interest in. The first transaction is for the import of good quality wines from France, since a retail liquor trading chain customer in the United States, for who you have been doing imports over the past five years has a very large order this time. The producer in France informed you that the current cost of the wine that you want to import is and 2,500,000. The producer in France will only ship goods in three months' time due to seasonal differences but payment will have to be conducted six months from now. The second transaction is for the export of 3d printers manufactured in the U.S.A. The country where it will be exported to is Canada. The payment of CAD 2,500,000 for the export to Canada will be received twelve months from now. You consider different transaction hedges, namely forwards, options and money market hedges. You are provided with the following quotes from your bank, which is an international bank with branches in all the countries: Forward rates: Currencies Spot 3 month (90 days) 1.14743 6 month (180 days) 1.15354 0.77475 9 month (270 days) 1.15969 12 month (360 days) 1.16587 $/ 1.141 34 $/CAD 0.76465 0.76559 0.76748 0.76843 Bank applies 360 day-count convention to all currencies (for this assignment apply 360 days in all calculations). Annual borrowing and investment rates for your company: Country 3 month rates Borrow Invest 6 months rates Borrow Invest 9 month rates Borrow Invest 12 month rates Borrow Invest United States Europe Canada 2.687% 0.505% 2.177% 2.554% 0.480% 2.069% 2.713% 0.510% 2.198% 2.580% 0.485% 2.090% 2.740% 0.515% 2.220% 2.607% 0.490% 2.112% 2.766% 0.5 20% 2.241% 2.633% 0.495% 2.133% Bank applies 360 day-count convention to all currencies. Explanation - e.g. 3 month borrowing rate on $ = 2.687%. This is the annual borrowing rate for 3 months. If you only borrow for 3 months the interest rate is actually 2.687%/4 = 0.67175% (always round to 5 decimals when you do calculations). Furthermore, note that these are the rates at which your company borrows and invests. The rates are not borrowing and investment rates from a bank perspective. Option prices: Currencies 3 month options 6 month options Call option Put option Call option Put option Strike Premium Strike Premium Strike Premium Strike Premium in $ in $ in $ in $ $/ $1.14399 $0.00174 $1.15088 $0.00174 $1.15010 $0.00173 $1.15702 $0.00152 $/CAD $0.76292 $0.00392 $0.76828 $0.00392 $0.77205 $0.00387 $0.77747 $0.00387 Bank applies 360 day-count convention to all currencies. (Students also have to apply 360 days in all calculations). Option premium calculations should include time value calculations based on US $ annual borrowing interest rates for applicable time periods e.g. 3 month $ option premium is subject to 2.687%/4 interest rate.) Table 5: France: Exchange rate hedges compared: (3 marks) Forward rate Money market hedge locked in exchange rate $/ Option hedge breakeven exchange rate Which hedging technique should be applied? (3 marks) Table 6: Canada export with money market hedge: (8 marks) PV of foreign currency to be borrowed Converted at $ amount with spot to $ for interest investment invested Exchange rate locked in with transaction Show answers in this row: Show your workings in the columns below the answers
