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The U.S. corporation, CAB Inc., which imports and exports electric cars, has a significant commercial partnership with Vietnam. Assuming you are the company's treasury manager,
The U.S. corporation, CAB Inc., which imports and exports electric cars, has a significant commercial partnership with Vietnam. Assuming you are the company's treasury manager, and your duties will include identifying and mitigating currency risks. The fluctuating exchange rate between the US Dollar (USD) and the Vietnamese Dong (VND) is now worrying you. You are investigating several techniques to protect yourself against the related currency rate risk in this situation. The company successfully signed a deal to supply electric cars to a customer with headquarters in Vietnam. The concern in question entails a substantial value of YND5 million, with the stipulated payment becoming due precisely three months from now. In.order..to mitigate potential foreign exchange risk, the Financial Director is inclined to adopt a hedging strategy. Notably, CAB Inc. currently lacks surplus funds to accommodate the credit period. However, the company possesses the capability to secure short-term loans at a rate of 2% above the prevailing money market rates or, alternatively, to invest at a rate of 2% below the said market rates. The company's bank has provided the following indicative rates. Given the exchange rate of VND per USD 1; Spot: 12.6898 - 12.6968; 1 month forward: 12.6767-12.6870; 3 month forward: 12.6480-12.6704. Current money market interbank rates. US: 7.0%6.75%; Vietnam: 5.25%5.0% (c) On the other hand, CAB plc's parts supplier, Vincor Co., based in European country that uses the Euro (), is due to receive the payment of US $20 million in four months. Given the current spot rate: US \$ per 1 : US $1.3585 - US $1.3618. Currency Futures (Contract size 125,000, quote: US $ per 1 ); 2-month futures : US $1.3633;5-month futures: US $1.3698. Calculate for Vincor Co. on futures contracts hedging strategy for the US\$ income it is due to receive in four months
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