Lammer Mark FieldingPritchard mefielding com 1 What are

What are we hedging? Don’t hedge pounds Receipt $490, payment $1640, net payment $1150

Forward Contract Payment $1150 Hedge for 5 months 3 month rate 1. 9066, 12

Money Market Hedge Payment $1150 Put on deposit $s 2%x 5/12= 0. 833% 1150/1.

Futures Payment $1150 Sell pounds December (1150000/1. 8986)/62500= 10 On 1 June Sell 10

Futures On 1 November buy back Base risk on 1 June 1. 9156 -

Options December Puts 1. 8800 2. 96 c 1. 8504 1. 9000 4. 34

Options On 1 November spot = 1. 9029 Therefore we won’t exercise (1150000/1. 9029)

Result Forward MMH Future UKP 604. 34 609. 28 604. 14 Option 617. 79

Dollar Imports Difference from T 0 Year Exch Rate $4. 20 0. 110 PV

c) Economic Exposure Economic exposure risk is the risk that positive NPV projects become

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Lammer Mark Fielding-Pritchard mefielding. com 1

What are we hedging? Don’t hedge pounds Receipt $490, payment $1640, net payment $1150 Write this, marks for matching and not hedging pounds mefielding. com 2

Forward Contract Payment $1150 Hedge for 5 months 3 month rate 1. 9066, 12 month rate 1. 8901 Therefore 1. 65 c over 9 months =. 1833 c per month or. 37 c in 2 months 1. 9066 -0. 0037= 1. 9029 1150000/1. 9029= UKP 604340 mefielding. com 3

Money Market Hedge Payment $1150 Put on deposit $s 2%x 5/12= 0. 833% 1150/1. 00833= $1141 Put on deposit $1141 Buy at 1. 9156= UKP= $1141/1. 9156 = UKP 595. 64 Assume we borrow pounds 5. 5 x 5/12= 2. 29 595. 64 x 1. 0229= UKP 609. 28 mefielding. com 4

Futures Payment $1150 Sell pounds December (1150000/1. 8986)/62500= 10 On 1 June Sell 10 Decembers mefielding. com 5

Futures On 1 November buy back Base risk on 1 June 1. 9156 - 1. 8986= 0. 0170 That will have declined by 5/7, so basis risk = 0. 0049 Spot on 1/11 = 1. 9029 Therefore futures price = 1. 9029 - 0. 0049= 1. 8980 Sold 1. 8986 Buy 1. 8980 Gain 0. 0006 0. 06 c x 62500 x 10 $375 $1, 150, 000 - 375 at spot 1. 9029 1155750/1. 9029= UKP 604142 mefielding. com 6

Options December Puts 1. 8800 2. 96 c 1. 8504 1. 9000 4. 34 c 1. 8566 1. 9200 6. 55 c 1. 8545 ($1150/1. 9000)31250= 19 Buy 19 December puts with a strike price of $1. 90 Premium price 4. 34 c x 31250 x 19= $25769 @1. 9156= UKP 13452 mefielding. com 7

Options On 1 November spot = 1. 9029 Therefore we won’t exercise (1150000/1. 9029) + 13452= 617792 mefielding. com 8

Result Forward MMH Future UKP 604. 34 609. 28 604. 14 Option 617. 79 mefielding. com 9

Dollar Imports Difference from T 0 Year Exch Rate $4. 20 0. 110 PV 0 1. 9156 2192525 1 1. 8598 2258300 65776 0. 901 59257 2 1. 8056 2326049 133525 0. 812 108422 3 1. 7530 2395831 203306 0. 731 148617 4 1. 7020 2467706 275181 0. 659 181344 5 1. 6524 2541737 349212 0. 593 207083 704724 mefielding. com 10

c) Economic Exposure Economic exposure risk is the risk that positive NPV projects become negative due to currency fluctuations Here the dollar is strengthening so costs are increasing We can match projects so we have projects which generate funds in $s Swaps offer us the opportunity to fix medium term liabilities US Export Credit Guarantee Finance may be available if we are importing US goods mefielding. com 11