Currency Hedging MJY plc December 05 Mark FieldingPritchard

Currency Hedging MJY plc December 05 Mark Fielding-Pritchard mefielding. com 1

Mistake in question!! MJYs payments are 120 + 170!! MJY We can ignore £s as we are British Receive $ € MJY 140 75 Sub 1 60 177 Sub 2 30 87 Total 230 339 Pay $ € MJY 290 72 Sub 1 0 85 Sub 2 50 85 Total mefielding. com 340 242 Hedging 110 Payment 97 Receipts 2

MJY- Payment $110 Forward We need dollars to make payment in 3 months 110000/1. 7835= £ 61676 payable in 3 months Option We need to sell pounds (pound is foreign currency as exchange in in US)- Puts February puts will close in February so we need May, use (or not in March) We need one Strike Including Premium 1. 80 0. 0534 1. 7466 1. 78 0. 042 1. 7380 mefielding. com 3

MJY- Payment $110 Option MJY will give pounds, they want to receive as many dollars as possible for each pound so hey will choose $1. 80 (which is why it is the most expensive) Premium cost $0. 0534 x 62500= $3338 @1. 7982 = £ 1856 Assuming we exchange the cost will be £ 62500 which gives us $112500 We pay $110000 then exchange $2500 back at spot (assume 1. 7861)= £ 1400 Net option outflows 1856 + 62500 - 1400= £ 62956 Forward £ 61676 So we use forward mefielding. com 4

MJY- Receipt € 97 Forward (97000/1. 4390)= £ 67408 Only possibility in question mefielding. com 5

Warren Buffett- Derivatives Advantages Disadvantages Allow risk mitigation Used for speculation Can be cheap Used by people who don’t understand them Liquid Full risks may be unmeasurable Accounts require mark to markets Market crashes may give unforeseen consequences Accounts require disclosures IT trading systems can introduce illogical decisions New derivatives introduced so fast that risk departments don’t understand what has happened mefielding. com 6