Question
Todays date: May 7, 2021 You work at the Treasury department of Apple, Inc. and oversee Apples FX risk management. Suppose Apple has an account
Todays date: May 7, 2021
You work at the Treasury department of Apple, Inc. and oversee Apples FX risk management. Suppose Apple has an account receivable of 1,452,890 due on June 7, 2021, 30 days from now. You are concerned with the potential decline in value vs. $ and want to hedge the position. The research department has provided following data to assist you with your hedging decision.
Currency Options available from the Philadelphia Stock Exchange | |||
Type | Exercise price | Premium | Maturity date |
Call | $1.4200 | $0.010 per | 6/7/2021 |
Put | $1.4200 | $0.035 per | 6/7/2021 |
Annual money market interest rates | ||
Rates | U.S. | UK |
Borrowing | 5.30% | 4.60% |
Deposit | 2.20% | 1.45% |
In addition, the following are the actual and expected spot and futures prices for May 7, 2021, and June 7, 2021.
Prices | Actual rates on 5/7/2021 | Assume actual rates on 6/7/2021 |
Spot exchange rate | $1.3910 | $1.4064 |
June 2021 futures price (settlement price) | $1.3980 | $1.4108 |
On May 7, 2021, Apple and Chase entered into a 30-day forward contract (the forward contract matures on June 7, 2021). The agreed forward rate is $1.4100 per .
Additional information:
- One futures contract on is for 62,500
- One options contract on is for 10,000
Given above information, answer the following question.
- Determine whether a
- 100% forward hedge;
- 100% money market hedge;
- 100% options hedge;
- 100% futures contract hedge;
- 55% with forward and 45% with futures contract; or
- No hedging
would be the most appropriate (that is, will result in the largest $ cash inflow). Show all your calculations.
2. As explained in the previous page, on May 7, 2021, Apple and Chase entered a forward contract that matures on June 7, 2021. Did Chase experience an opportunity cost by entering the forward contract with Apple on May 7, 2021? If yes, calculate the actual opportunity cost and show all your calculations. If not, provide an explanation. Simply stating Yes or No is not enough.
3. Find the spot exchange rate on June 7, 2021 that will leave Apple indifferent between money market hedging and currency option hedging strategy. Show all your calculations.
4. Calculate the net gain or loss from futures hedging. Show all your calculations.
5. Which hedging strategies listed in question (1) above (100% forward, 100% money market, 100% options, 100% futures, or combination of 55% forward and 45% futures) gave Apple 100% coverage? Explain your answer. Simply mentioning strategies is not enough.
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