RainMap is an Australian firm that sells interactive maps to customers across Europe. Its main competitors are from the U.S. and Europe. The firm expects to receive 10 million in 180 days from its contract with EuroMap, a German firm. RainMap wishes to hedge against the exposure. Three months ago, the European interest rate was 0.5% p.a. which was lower than the Australian interest rate of 1% p.a. However, after a series of rate hikes, the European prevailing interest rate is 2% p.a., while that of Australia is 1.5% p.a. The current spot rate of the is $1.5. The 180-day forward price is $1.4/. The 180-day European call option on $ with an exercise price of 0.66 is selling at a 2% premium. The 180-day European put option on $ with an exercise price of 0.67 is selling at a 3% premium. A) What is the $ receipt of using a forward hedge at the time the payment is due? (3 marks) B) What is the $ receipt of using money markets to hedge at the time the payment is due? (5 marks) C) What is the S receipt of an option hedge at the time the payment is due assuming you exercise the option when the payment is due? (5 marks) D) Based on the answers in (A), (B), and (C), which hedging methods should RainMap choose? (2 marks) E) If RainMap is worried about the ability of EuroMap to make the payment when it is due, what is the preferred transactional hedge and why? (4 marks) F) During an investor presentation, RainMap's CEO makes the following comment: "We are fully hedged against exchange rate movements for the next two years, our attention is to focus on operational risk as currency risk is no longer an issue". Evaluate the CEO's comment. (6 marks) RainMap is an Australian firm that sells interactive maps to customers across Europe. Its main competitors are from the U.S. and Europe. The firm expects to receive 10 million in 180 days from its contract with EuroMap, a German firm. RainMap wishes to hedge against the exposure. Three months ago, the European interest rate was 0.5% p.a. which was lower than the Australian interest rate of 1% p.a. However, after a series of rate hikes, the European prevailing interest rate is 2% p.a., while that of Australia is 1.5% p.a. The current spot rate of the is $1.5. The 180-day forward price is $1.4/. The 180-day European call option on $ with an exercise price of 0.66 is selling at a 2% premium. The 180-day European put option on $ with an exercise price of 0.67 is selling at a 3% premium. A) What is the $ receipt of using a forward hedge at the time the payment is due? (3 marks) B) What is the $ receipt of using money markets to hedge at the time the payment is due? (5 marks) C) What is the S receipt of an option hedge at the time the payment is due assuming you exercise the option when the payment is due? (5 marks) D) Based on the answers in (A), (B), and (C), which hedging methods should RainMap choose? (2 marks) E) If RainMap is worried about the ability of EuroMap to make the payment when it is due, what is the preferred transactional hedge and why? (4 marks) F) During an investor presentation, RainMap's CEO makes the following comment: "We are fully hedged against exchange rate movements for the next two years, our attention is to focus on operational risk as currency risk is no longer an issue". Evaluate the CEO's comment. (6 marks)
