EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 22, Problem 2CP
A
Summary Introduction
To explain: Characteristics of at-the money Swiss franc call options, forward and future trading to hedge the currency exposure.
Introduction: Call option provides a long situation to the buyer or traders at specific rate. It is a right. If terms are not fruitful for the buyer, then he may not go for this option.
B
Summary Introduction
To explain: Characteristics of the call option and reason to accept this one among others.
Introduction: Call option gives long circumstances to the purchaser or traders at precise rate. It is a right. If terms are not fruitful for the consumer, then he may not go for this option.
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Michelle Industries issued a Swiss franc--denominated 5-year discount note for SFr200 million
The proceeds were converted to U.S. dollars to purchase capital equipment in the United States.
The company want to hedge this currency expose and is considering the following alternatives:
At-the-money Swiss franc call options.
• Swiss franc forwards
• Swiss franc futures.
●
What is an advantage of the suitability of this strategy in relation to Michelle's hedging
objective?
O The major difference from the firm's perspective between futures and forwards is in the book-to-market
feature of futures.
The put option is distinguished by its symmetric payoff.
O The call option gives the company the ability to benefit from depreciation in the franc, but at a cost equal
to the option premium.
There is no advantage.
Jordan Corp is a US manu8facturer of auto pats with branchoperatiopns in France. on December 31, 2018 wishesto use a foreign currency option to hedge a 10,000,000 euro denominated accounts receivable that is due in two years. Jordan plans to use fair value hedge accounting. Over the subsequent 4 quarters the following are the changes in fair value of the receivable and the forreign currency option hedge.
1) Quarter ended March 31, 2019:
Euro receivable increases by $400,000
Option hedge declines by $350,000
2) Quater ended June 30, 2019:
Euro receivable decreases by $500,000
Option hedge increases by $400,000
3) Quarter ended Sept 30, 2019:
Euro receivable decreases by $800,000
Option hedge increases by $700,000
4) Quarter ended Dec. 31, 2019:
Euro receivable increases by $200,000
Option hedge declines by $100,000
Identify by codification reference, e.g. xxx-xx-xx-xx, and attach and highlight the appropriate section(s) of FASB codification that describe the alternate criteria that can…
Jordan Corp is a US manu8facturer of auto pats with branchoperatiopns in France. on December 31, 2018 wishesto use a foreign currency option to hedge a 10,000,000 euro denominated accounts receivable that is due in two years. Jordan plans to use fair value hedge accounting. Over the subsequent 4 quarters the following are the changes in fair value of the receivable and the forreign currency option hedge.
1) Quarter ended March 31, 2019:
Euro receivable increases by $400,000
Option hedge declines by $350,000
2) Quater ended June 30, 2019:
Euro receivable decreases by $500,000
Option hedge increases by $400,000
3) Quarter ended Sept 30, 2019:
Euro receivable decreases by $800,000
Option hedge increases by $700,000
4) Quarter ended Dec. 31, 2019:
Euro receivable increases by $200,000
Option hedge declines by $100,000
Questions:
a) Structure the appropriate fair value hedge using an FX option. Answer must state whether Jordan is purchasing or selling an option, what is the expiration date…
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- An Omani importer will receive commodities from USA and he has to pay an amount of USD 250,000 next month. Which of the below markets is well suited to offer hedging protection against this transactions risk exposure? a. Inflation rate market O b. Transactions market C. Spot market O d. Forward marketarrow_forwardSelect each of the following strategies that can be used to hedge the foreign exchange risk of a British entity expecting to receive 1m INR in one year: Group of answer choices Borrowing GBP against the receivable, converting to INR, and investing the INR at Indian interest rates. Entering a long position in a forward contract on the INR. Entering a short position in a put on the INR. Entering a long position in a put on the INR. Borrowing INR against the receivable, converting to GBP, and investing the GBP at British interest rates. Entering a short position in a forward on the INR.arrow_forwardSuppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the Philadelphia exchange in units of €10,000 with strike prices of $1.60/€1.00.Options (calls and puts) are available on the Philadelphia exchange in units of £10,000 with strike prices of $2.00/£1.00. For a U.S. firm to hedge a €100,000 receivable, Multiple Choice buy 10 put options on the pound with a strike in dollars. buy 10 call options on the euro with a strike in dollars. sell 8 put options on the pound with a strike in dollars. sell 10 call options on the euro with a strike in dollars.arrow_forward
- Busco has a foreign-currency denominated payable, itcan hedge by buying the foreign currency payableforward. The company can expect to eliminate theexposure without incurring costs as long as the forwardexchange rate is an unbiased predictor of the future spotrate. Busco exported an A380 to a UK company, and wasbilled the sum of £ 12,000,000 payable in three months.Currently the spot rate is $1.40/£ and the three-monthforward rate is $1.36/£.The three-month money marketinterest rate is 12% per annum in US and 8% per annumin UK.So the management of Busco decided to managethis transaction exposure and use the money markethedge to deal with this pound account payable. 1)Conduct a cash flow analysis of the money market hedge. Answer: Transaction Current cash flow (3-month) Cash flow at maturity 1 Borrow £ =£11,764,705.88 - £12,000,000 2 Buy $ spot with £ = $16, 470,588.24 - £11,764,705.88 0 3 Invest in US - $16, 470,588.24…arrow_forwardCheng has a 80,000 foreign currency receivable due in 60 days. What is the appropriate action for Cheng to take today if it wishes to hedge its foreign exchange exposure. a. Enter into a FX spot contract today, purchasing foreign currency and selling US dollars b. Sell an FX option today to a Bank, giving the Bank the right but not the obligation to sell to Roberts 50,000 foreign currency and buy US dollars in 60 days. c. Enter into an FX forward today buying foreign currency and selling US dollars for settlement in 60 days d. Enter into an FX forward today buying US dollars and selling foreign currency for settlement in 60 days. e. Buy an FX option today giving Roberts the right but not the obligation to buy 50,000 foreign currency and sell US dollars in 60 daysarrow_forwardthe following table The rates at which they can get the required funds in their respective markets are shown in floating rate funds, and Aramco needs US dollar fixed rate funds. HSBC recently arranged a swap between Oman Oil and Aramco. Oman oil needs US dollar Oman Oil Aramco Floating Rate Funds LIBOR + 4% LIBOR +1% Fixed Rate Funds 11% 10% HSBC arranged a swap such that both the Oman Oil and Aramco benefited from the swap. Three possible answers are shown below. Which one is probably the correct one. funds to Aramco at 10% A. Aramco gives floating rate funds to Oman Oil at LIBOR+2%, and Oman Oil gives B. Aramco gives floating rate funds to Oman Oil at LIBOR+3%, and Oman Oil gives funds to Aramco at 10% C. Aramco gives floating rate funds to Oman Oil at LIBOR+4%, and Oman Oil gives funds to Aramco at 9% Draw a diagram showing how the SWAP worksarrow_forward
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