Money Market Hedge on Receivables.
Assume that Stevens Point Co. has net receivables of
100,000 Singapore dollars in 90 days. The spot rate of the S$ is $.50, and the Singapore interest
rate is 2% over 90 days. Suggest how the U.S. firm could implement a money market hedge. Be
- Real Cost of Hedging Payables. Assume that Suffolk Co. negotiated a forward contract to purchase 200,000 British pounds in 90 days. The 90-day forward rate was $1.40 per British pound. The pounds to be purchased were to be used to purchase British supplies. On the day the pounds were delivered in accordance with the forward contract, the spot rate of the British pound was $1.44. What was the real cost of hedging the payables for this U.S. firm?
- Forward versus Money Market Hedge on Payables. Assume the following information:
90-day U.S. interest rate = 4%
90-day Malaysian interest rate = 3%
90-day forward rate of Malaysian ringgit = $.400 Spot rate of Malaysian ringgit = $.404
Assume that the Santa Barbara Co. in the United States will need 300,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated costs for each type of hedge.
- Leading and Lagging. Under what conditions would Zona Co.’s subsidiary consider using a “leading” strategy to reduce transaction exposure? Under what conditions would Zona Co.’s subsidiary consider using a “lagging” strategy to reduce transaction exposure?
- Hedging With Put Options. As treasurer of Tucson Corp. (a U.S. exporter to New Zealand), you must decide how to hedge (if at all) future receivables of 250,000 New Zealand dollars 90 days from now. Put options are available for a premium of $.03 per unit and an exercise price of $.49 per New Zealand dollar. The forecasted spot rate of the NZ$ in 90 days follows:
Future Spot Rate Probability
$.44 30% .40 50 .38 20
Given that you hedge your position with options, create a probability distribution for U.S. dollars to be received in 90 days.