The Dutch manufacturer Cloghopper has the following jpy commitments: A/R of jpy 1,000,000 for thirty days.
Question:
The Dutch manufacturer Cloghopper has the following jpy commitments:
• A/R of jpy 1,000,000 for thirty days.
• A/R of jpy 500,000 for ninety days.
• Sales contract (twelve months) of jpy 30,000,000.
• A forward sales contract of jpy 500,000 for ninety days.
• A deposit that at maturity, in three months, pays jpy 500,000.
• A loan for which Cloghopper will owe jpy 8,000,000 in six months.
• A/P of jpy 1,000,000 for thirty days.
• A forward sales contract for jpy 10,000,000 for twelve months.
• A/P of jpy 3,000,000 for six months.
(a) What is Cloghopper's net exposure for each maturity?
(b) How would Cloghopper hedge the exposure for each maturity on the forward market?
(c) Assume that the interest rate is 5 percent (compound, per annum) for all maturities and that this rate will remain 5 percent with certainty for the next twelve months. Also, ignore bid-ask spreads in the money market. How would the company hedge its exposure on the spot market and the jpy money market? Describe all money-market transactions in detail.
(d) If the interest rate is 5 percent (compound, per annum) for all maturities and will remain 5 percent with certainty for the next twelve months, how would the company hedge its exposure on the forward market if only one forward contract is used?
(e) Assume that Cloghopper prefers to use traded options rather than forward contracts. The option contracts are not divisible, have a life of either 90, 180, 270, or 360 days, and for each maturity the face value of a contract is jpy 1,000,000. How could Cloghopper hedge its exposure? Do the options offer a perfect hedge for each maturity?
(f) Drop the assumption of a flat and constant term structure. If Cloghopper wants to hedge its exchange rate exposure using one forward contract and its interest rate exposure using FRA contracts, how would the analysis of parts (c) and (d) be affected? A verbal discussion suffices.
(g) The term structure is flat right now (at 5 percent p.a., compound), but is uncertain in the future. Consider the spot hedge of part (c). If, instead of FRAs, duration is used to eliminate the interest risk, how should Cloghopper proceed?
Exchange RateThe value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
Step by Step Answer:
a b For 30 days sell jpy 500000 forward For 90 days no hedging necessary For 180 days buy jpy 11000000 forward For 360 days sell jpy 20000000 forward c The total timet value of Cloghoppers exposure eq...View the full answer
International Finance Putting Theory Into Practice
ISBN: 978-0691136677
1st edition
Authors: Piet Sercu
