Beruflich Dokumente
Kultur Dokumente
1 P & G India
Proctor and Gambles affiliate in India, P & G India, procures much of its toiletries product line from a Japanese company. Because of the
shortage of working capital in India, payment terms by Indian importers are typically 180 days or longer. P & G India wishes to hedge a 8.5
million Japanese yen payable. Although options are not available on the Indian rupee (Rs), forward rates are available against the yen.
Additionally, a common practice in India is for companies like P & G India to work with a currency agent who will, in this case, lock in the
current spot exchange rate in exchange for a 4.85% fee. Using the following exchange rate and interest rate data, recommend a hedging
strategy.
Assumptions
180-day account payable, Japanese yen ()
Spot rate (/$)
Spot rate, rupees/dollar (Rs/$)
Implied (calculated) spot rate (/Rs)
180-day forward rate (/Rs)
Expected spot rate in 180 days (/Rs)
180-day Indian rupee investing rate
180-day Japanese yen investing rate
Currency agent's exchange rate fee
P & G India's cost of capital
Values
8,500,000
120.60
47.75
2.5257
2.4000
2.6000
8.000%
1.500%
4.850%
12.00%
Hedging Alternatives
(120.60 / 47.75)
Values
Spot
Rate (Rp/$)
Risk
Assessment
3,365,464.34
2.5257
Risky
3,541,666.67
2.4000
Risky
3,269,230.77
2.6000
Risky
3,541,666.67
2.4000
Certain
Principal A/P ()
discount factor for yen investing rate for 180 days
Principal needed to meet A/P in 180 days ()
8,500,000.00
0.9926
8,436,724.57
2.5257
3,340,411.26
1.0600
3,540,835.94
Certain
8,500,000.00
2.5257
3,365,464.34
163,225.02
1.0600
173,018.52
3,538,482.87
Evaluation of Alternatives
The currency agent is the lowest total cost, in CERTAIN future rupee value, of all certain alternatives.
Certain
Assumptions
US dollar debt taken out in June 1997
US dollar borrowing rate on debt
Initial spot exchange rate, baht/dollar, June 1997
Average spot exchange rate, baht/dollar, June 1998
Value
50,000,000
8.400%
25.00
42.00
$
$
50,000,000
4,200,000
54,200,000
25.00
1,355,000,000
1,250,000,000
105,000,000
$
$
50,000,000
4,200,000
54,200,000
42.00
2,276,400,000
(1,355,000,000)
921,400,000
68.000%
the payment is 68% higher than expected!
111.40/$
111.00/$
110.40/$
109.20/$
8.850%
9.200%
How much in U.S. dollars will BioTron Medical receive 1) with the discount and 2) with no discount but fully
covered with a forward contract?
Assumptions
BioTron's 30-day account receivable, Japanese yen
Spot rate, /$
30-day forward rate, /$
90-day forward rate, /$
180-day forward rate, /$
Numata's WACC
BioTron Medical's WACC
Desired discount on purchase price by Numata
Values
12,500,000
111.40
111.00
110.40
109.20
8.850%
9.200%
4.500%
Brent Bush should compare two basic alternatives, both of which eliminate the currency risk.
1. Allow the discount and receive payment in Japanese yen in cash
Account recievable (yen)
Discount for cash payment up-front (4.500%)
Amount paid in cash net of discount
Current spot rate
Amount received in U.S. dollars by Seattle Scientific
12,500,000
(562,500)
11,937,500
111.40
107,158.89
12,500,000
111.00
112,612.61
0.9924
111,755.82
2. Not offer any discounts for early payment and cover exposure with forwards
Account receivable (yen)
30-day forward rate
Amount received in cash in dollars, in 30 days
Discount factor for 30 days @ Seattle's WACC
Present value of dollar cash received
Brent Bush should politely decline Numata's offer to pay cash in exchange for the requested discount.
Assumptions
Receivable due in one year, US dollars
Payable due in one year, US dollars
Spot rate, reais per dollar (R$/$)
One-year US dollar eurocurrency interest rate
One-year Brazilian govt deposit note
Implied one year forward rate = spot x ( 1 + iR$ ) / ( 1 + i$ )
Analysis
Values
$80,000,000
$20,000,000
1.8240
4.00%
10.50%
1.9380
Values
Risk
Assessment
$80,000,000
($20,000,000)
$60,000,000
Certain
This is a net long position, meaning, Embraer will be receiving US dollars on net. Given the history of the Brazilian reais, that
it has traditionally suffered from rapid depreciation and occasional devaluation, a net long position in dollars by most Brazilian
companies is considered a very good thing.
R$ 109,440,000.00
Risky
R$ 116,280,000.00
Certain
In this case, however, because the reais is selling forward at a considerable discount, the net long position -- if sold forward -yields considerably more reais than the current spot rate. It should also be noted, however, that if the reais were to fall
considerably over the coming year, by remaining unhedged Embraer would enjoy greater reais returns.
Alternatives
Values
Rp1,650,000,000
9,450
9,400
9,950
$168,000.00
At Spot
$174,603.17
Risk
Assessment
Values
1. Remain Uncovered.
Settle A/R in 90 days at current spot rate.
If spot rate in 90 days is same as current
(Rp 1,650,000,000 / Rp 9,450/$)
$174,603.17
Risky
$175,531.91
Risky
$165,829.15
Risky
$165,829.15
Certain
-20.1%
Analysis
The Indonesian rupiah has been highly volatile in recent years. This means that during the 90-day period,
any variety of economic or political or social events could lead to an upward bounce in the exchange rate,
reducing the dollar proceeds at settlement to an unacceptable level.
Unfortunately, the forward contract does not result in dollar proceeds which meet the minimum margin.
The cost of forward cover, 20.1%, is indicative of the "artificial interest rates" used by some financial
institutions while pricing derivatives in emerging, illiquid, and volatile markets.
In the end, Vizor will have to decide whether making the sale into this specific market is worth breaking a
company policy on minimum proceeds (forward cover) or taking significant currency risk by not using
a forward cover.
Assumptions
90-day A/R ()
Current spot rate ($/)
Credit Suisse 90-day forward rate ($/)
Barclays 90-day forward rate ($/)
Expected spot rate in 90 days ($/)
90-day eurodollar interest rate
90-day euro interest rate
Implied 90-day forward rate (calculated, $/)
90-day eurodollar borrowing rate
90-day euro borrowing rate
Mattel Toys weighted average cost of capital ($)
Hedging Alternatives
$1.4158
$1.4172
$1.4195
9.600%
4.000%
3.885%
5.000%
5.000%
Values
30,000,000.00
$1.4158
$1.4172
$1.4195
$1.4200
4.000%
3.885%
$1.4162
5.000%
5.000%
9.600%
Values
Risk
Assessment
$42,474,000.00
Risky
$42,516,000.00
Risky
$42,585,000.00
Risky
$42,600,000.00
Risky
$42,516,000.00
Certain
$42,585,000.00
Certain
30,000,000.00
0.9877
29,629,629.63
$1.4158
$41,949,629.63
1.0240
$42,956,420.74
1 + (.0960 x 90/360)
Certain
Evaluation of Alternatives
The money market hedge guarantees Mattel the greatest dollar value for the A/R when using the cost of capital as the reinvestment
rate (carry-forward rate).
Steps:
Borrow euro, exchange it to
dollar, invest the dollar.
Comment:
Suppose Mattel can invest the dollar to earn its
cost of capital 9,6%, then the value is the
highest.
111
Bobcat Company, U.S.-based manufacturer of industrial equipment, just purchased a Korean company that produces plastic nuts and
bolts for heavy equipment. The purchase price was Won7,500 million. Won1,000 million has already been paid, and the remaining
Won6,500 million is due in six months. The current spot rate is Won1,110/$, and the 6-month forward rate is Won1,175/$. The sixmonth Korean won interest rate is 16% per annum, the six-month US dollar rate is 4% per annum. Bobcat can invest at these interest
rates, or borrow at 2% per annum above those rates. A six-month call option on won with a 1200/$ strike rate has a 3.0% premium,
while the six-month put option at the same strike rate has a 2.4% premium.
Bobcat's weighted average cost of capital is 10%. Compare alternate ways that Bobcat might deal with its foreign exchange exposure.
What do you recommend and why?
Assumptions
Purchase price of Korean manufacturer, in Korean won
Less initial payment, in Korean won
Net settlement needed, in Korean won, in six months
Current spot rate (Won/$)
Six month forward rate (Won/$)
Bobcat's cost of capital (WACC)
Values
7,500,000,000
(1,000,000,000)
6,500,000,000
1,110
1,175
10.00%
Call Option
1,200.00
3.000%
Put Option
1,200.00
2.400%
United States
4.000%
2.000%
6.000%
Korea
16.000%
2.000%
18.000%
Values
Certainty
6,500,000,000
1,110
5,855,855.86
Uncertain.
6,500,000,000
1,175
5,531,914.89
Uncertain.
6,500,000,000
1,175.00
5,531,914.89
Certain.
3. Money market hedge. Exchange dollars for won now, invest for six months.
Account payable (won)
Discount factor at the won interest rate for 6 months
Won needed now (payable/discount factor)
Current spot rate (won/$)
US dollars needed now
Carry forward rate for six months (WACC)
US dollar cost, in six months, of settlement
6,500,000,000
1.080
6,018,518,518.52
1,110.00
5,422,088.76
1.050
5,693,193.19
If exercised
6,500,000,000
1,110.00
3.000%
175,675.68
borrow dollar, exchange it to won, invest in won interest rate. Dollar cost is at the company's cost of capital
Certain.
$
$
5,416,666.67
184,459.459
5,601,126.13
Maximum.
If not exercised
1,300.00
$
$
5,000,000.00
184,459.46
5,184,459.46
The forward contract provides the lowest CERTAIN cost hedging method for payment settlement. If, however, the firm believes the
ending spot rate will be a weaker Won, Won1,200/$ or higher, then the call option would be a lower cost alternative. This would require,
however, that the firm accept foreign exchange risk and be willing to suffer the higher cost of the call option in the event that the Won
did not fall to the needed level.
suppose the spot rate is higher than you could get from the call contract.
Aquatech is a U.S.-based company which manufactures, sells, and installs water purification equipment. On April 11th the company sold a
system to the City of Nagasaki, Japan, for installation in Nagasakis famous Glover Gardens (where Puccinis Madame Butterfly waited for
the return of Lt. Pinkerton.) The sale was priced in yen at 20,000,000, with payment due in three months.
Spot exchange rate:
One-month forward rate:
Three-month forward:
One-year forward:
Money Rates
One month
Three months
Twelve months
Japan
0.09375%
0.09375%
0.31250%
Differential
4.78125%
4.84375%
4.87500%
Note: The interest rate differentials vary slightly from the forward discounts on the yen because of time differences for the quotes. The
spot 118.255/$, for example, is a mid-point range. On April 11, the spot yen traded in London from 118.30/$ to 117.550/$.
Additional information: Aquatechs Japanese competitors are currently borrowing yen from Japanese banks at a spread of 2 percentage
points above the Japanese money rate. Aquatech's weighted average cost of capital is 16%, and the company wishes to protect the dollar
value of this receivable.
Three-month options from Kyushu Bank:
* Call option on 20,000,000 at exercise price of
118.00/$: a 1% premium.
* Put option on 20,000,000, at exercise price of
118.00/$: a 3% premium.
a) What are the costs and benefits of alternative hedges? Which would you recommend, and why?
b) What is the break-even reinvestment rate when comparing forward and money market alternatives?
Assumptions
Amount of receivable, Japanese yen ()
Spot exchange rate at time of sale (/$)
Booked value of sale (amount/spot rate)
Days receivable due
Aquatech's WACC
Competitor borrowing premium, yen ()
Forward rates and premiums
One-month forward rate (/$)
Three-month forward rate (/$)
One-year forward rate (/$)
Values
20,000,000
118.255
$169,126.04
90
16.0%
2.0%
Forward Rate
117.760
116.830
112.450
Premium
5.04%
4.88%
5.16%
United States
4.8750%
4.9375%
5.1875%
Japan
0.09375%
0.09375%
0.31250%
Purchased options
3-month call option on yen
3-month put option on yen
Strike (yen/$)
118.000
118.000
Premium
1.0%
3.0%
Values
Certainty
a. Alternative Hedges
1. Remain uncovered.
Account receivable (yen)
Possible spot rate in 90 days (yen/$)
Cash settlement in 90 days (US$)
20,000,000
118.255
$169,126.04
Uncertain.
20,000,000
116.830
$171,188.91
Certain.
20,000,000
1.00523
19,895,858
118.255
$168,245.38
1.0400
$174,975.20
20,000,000
118.255
3.000%
$5,073.78
$169,491.53
(5,276.732)
$164,214.79
1 + (.16 x 90/360)
Certain.
The put option does not GUARANTEE the company of settling for the booked amount.
The money market and forward hedges do; the money market yielding the higher proceeds.
b) Breakeven rate between the money market and the forward hedge is determined by the reinvestment rate:
Money market, US$ up-front
$168,245.38
Forward contract, US$, end of 90 days
$171,188.91
(1 + x)
101.750%
$168,245.38 (1+x) = $171,188.91
x
1.74954%
For 90 days
Breakeven rate, % per annum
$0.06998
0-90 days
75%
100%
91-180 days
60%
90%
Compass Rose expects to receive multiple payments in Danish kroner over the next year. DKr 3,000,000 is due in 90 days; DKr
2,000,000 is due in 180 days; and DKr 1,000,000 is due in one year. Using the following spot and forward exchange rates, what
would be the amount of forward cover required by company policy by period?
Assumptions
Spot rate, DKr/C$
3-month forward rate, DKr/C$
6-month forward rate, DKr/C$
12-month forward rate, DKr/C$
South Face's Exposures
A/R due in 3 months, DKr
A/R due in 6 months, DKr
A/R due in 12-months, DKr
Values
4.70
4.71
4.72
4.74
0-90 days
3,000,000
Forward
Discount
-0.85%
-0.85%
-0.84%
91-180 days
2,000,000
1,000,000
0-90 days
75%
91-180 days
60%
50%
2,250,000
1,200,000
477,707.01
254,237.29
500,000
105,485.23
33.40
32.40
1.500%
6.500%
not available
Analyze the costs and risks of each alternative, and then make a recommendation as to which alternative Thomas Carson
should choose.
Assumptions
Acquisition price & 3-month A/P, NewTaiwan dollars (T$)
Spot rate (T$/$)
3-month forward rate (T$/$)
3-month Taiwan dollar deposit rate
3-month dollar borrowing rate
3-month call option on T$
Thomas Carson's credit line with Bank of Hawaii
Evaluation of Alternatives
Values
7,000,000
33.40
32.40
1.500%
6.500%
not available
200,000
Cost
Certainty
209,580.84
Risky
216,049.38
Risky
216,049.38
Certain
7,000,000
0.9963
6,973,848
33.40
208,797.85
6.500%
1.0163
212,190.81
Certain
The currency risk is eliminated, but since Thomas Carson would have to exchange the money up front, it would require him to
borrow the money, increasing his debt outstanding for the entire 3 months.
Discussion.
This is a difficult decision. The forward contract appears to be the preferable choice, protecting him against an appreciating
T$, and creating a certain cash purchase payment. The problem, however, will be whether the Bank of Hawaii will allow him
to purchase a forward for the full $216,049.38, which is slightly above his credit line currently in place. If his relationship is
good with the bank, they most likely would increase his line sufficiently to allow the forward contract.
Values
1,560,000
$1.2224
$1.2270
$1.1600
$1.2600
Hedged
the Minimum
Hedged
the Maximum
70%
1,560,000
70%
1,092,000
$1.2270
$1,339,884
120%
1,560,000
120%
1,872,000
$1.2270
$2,296,944
468,000
$1.1600
$542,880
( 312,000)
$1.1600
($361,920)
$1,339,884
$2,296,944
$1,882,764
$1,935,024
468,000
$1.2600
$589,680
( 312,000)
$1.2600
($393,120)
1,339,884
2,296,944
$1,929,564
$1,903,824
$1,914,120
$1,914,120
This is not a conservative hedging policy. Any time a firm may choose to leave any proportion uncovered, or purchase cover for more
than the exposure (therefore creating a net short position) the firm could experience nearly unlimited losses or gains.
8,400,000
7.0000
7.1000
14.000%
6.000%
20.000%
Lucky 13's treasury manager, concerned about the Guatemalan economy, wonders if Lucky 13 should be hedging its foreign
exchange risk. The managers own forecast is as follows:
Expected spot rate in six-months (quetzals/$):
Highest expected rate (reflecting a significant devaluation)
Expected rate
Lowest expected rate (reflecting a strengthening of the quetzal)
8.0000
7.3000
6.4000
What realistic alternatives are available to Lucky 13 for making payments? Which method would you select and why?
What realistic alternatives are available to Lucky 13?
Cost
Certainty
1,050,000.00
Risky
Expected rate
1,150,684.93
Risky
1,312,500.00
Risky
1,183,098.59
Certain
7,850,467.29
1,121,495.33
1.10
1,233,644.86
Certain
$
$
The second choice, the forward contract, results in the lowest cost alternative among certain alternatives.
Date
February 1
March 1
June 1
August 1
September 1
Event
Price quotation for Pegg
Contract signed for sale
Contract amount, pounds
Product shipped to Pegg
Product received by Pegg
Grand Met makes payment
Spot Rate
($/)
1.7850
1.7465
1,000,000
1.7689
1.7840
1.7290
Forward Rate
($/)
1.7771
1.7381
Days Forward
of Forward Rate
210
180
1.7602
1.7811
---------
90
30
---------
Analysis
a. The sale is booked at the exchange rate existing on June 1, when the product is shipped to Pegg Metropolitan, and the shipment
is categorized as an account receivable. This sale is then compared to that value in effect on the date of cash settlement,
the difference being the foreign exchange gain (loss).
Value as settled
Value as booked
FX gain (loss)
$1,729,000
$1,768,900
($39,900)
b. The value of the foreign exchange gain (loss) will depend upon when Jason actually purchases the forward contract. Because
many firms do not define an "exposure" as arising until the date that the product is shipped (loss of physical control over
the goods) and the sale is booked on the income statement, that is a common date for the purchase of the forward contract.
Forward contract purchased on June 1
Value of forward settlement 1 million pounds @ $1.7602/pound
Value as booked
1 million pounds @ $1.7689/pound
FX gain (loss)
$1,760,200
$1,768,900
($8,700)
A more aggressive alternative is for Jason to purchase the forward contract on the date that the contract was signed, March 1, lockingin Burton's U.S. dollar settlement amount a full 90 days earlier in the transaction exposure's life span.
Forward contract purchased on March 1
Value of forward settlement 1 million pounds @ $1.7381/pound
Value as booked
1 million pounds @ $1.7689/pound
FX gain (loss)
$1,738,100
$1,768,900
($30,800)
Note that in this case if Jason had covered forward on March 1st rather than June 1st, the amount of the foreign exchange loss would
have been even greater, although "fully hedged." The difference is of course the result of the forward rate changing with spot rates
and interest differentials.
Six-month call options on 6,000,000 dirhams at an exercise price of 10.00 dirhams per dollar are available from Bank AlMaghrub at a premium of 2%. Six-month put options on 6,000,000 dirhams at an exercise price of 10.00 dirhams per dollar are
available at a premium of 3%. Compare and contrast alternative ways that Micca might hedge its foreign exchange transaction
exposure. What is your recommendation?
Assumptions
Shipment of phosphates from Morocco, Moroccan dirhams
Micca's cost of capital (WACC)
Spot exchange rate, dirhams/$
Six-month forward rate, dirhams/$
Values
6,000,000
14.000%
10.00
10.40
Call Option
10.00
2.000%
Put Option
10.00
3.000%
United States
6.000%
5.000%
Morocco
8.000%
7.000%
Values
Certainty
6,000,000
10.00
600,000.00
Uncertain.
6,000,000
10.40
576,923.08
Uncertain.
6,000,000
10.40
576,923.08
Certain.
3. Money market hedge. Exchange dollars for dirhams now, invest for six months.
Account payable (dirhams)
6,000,000.00
Discount factor at the dirham investing rate for 6 months
1.035
Dirhams needed now for investing (payable/discount factor)
5,797,101.45
Current spot rate (dirhams/$)
10.00
US dollars needed now
$
579,710.14
Carry forward rate for six months (WACC)
1.070
US dollar cost, in six months, of settlement
$
620,289.86
Certain.
$
$
$
6,000,000.00
10.00
2.000%
12,000.00
600,000.00
12,840.000
612,840.00
Maximum.
The lowest cost certain alternative is the forward. If Micca were to expect the dirham to depreciate significantly over the next six
months, it may choose the call option.
Value
3,000,000.00
$1.7620
$1.7550
6.000%
8.000%
8.000%
14.000%
$1.75
1.500%
$1.71
1.000%
12.000%
$1.7850
Rate ($/pound)
Proceeds
$1.7620
$1.7550
$1.7850
$5,286,000.00
$5,265,000.00
$5,355,000.00
Rate ($/pound)
Proceeds
$1.7550
$5,265,000.00
Rate ($/pound)
Proceeds
3,000,000.00
0.9662
2,898,550.72
$1.7620
$5,107,246.38
1.0300
$5,260,463.77
Option premium
Notional principal of option (pounds)
Spot rate ($/pound)
Option premium, US$
Carry-forward factor, WACC, for 90 days
Total premium cost, in 90 days
$5,250,000.00
(81,668.70)
$5,168,331.30
$5,130,000.00
(54,445.80)
$5,075,554.20
$1.7825
$5,347,500.00
(81,668.70)
$5,265,831.30
$1.7732
$5,319,600.00
(54,445.80)
$5,265,154.20
Analysis: Maria Gonzalez would receive the most certain US$ from the forward contract, $5,265,000; the money market hedge is less
attractive as a result of the higher borrowing costs in the U.K. now. The two put options would yield unattractive amounts if they had
to be exercised. As shown, the $1.75 strike price put option would be superior to the forward if the ending spot rate were $1.7825 or
higher; the $1.71 strike price would be superior to the forward if the ending spot rate were $1.7732 or higher.
By the time the order was received and booked on May 1st, the euro had strengthened to $1.1000/, so the sale was in fact worth 4,000,000
x $1.1000/ = $4,400,000. Larkin had already gained an extra $80,000 from favorable exchange rate movements. Nevertheless Larkin's
director of finance now wondered if the firm should hedge against a reversal of the recent trend of the euro. Four approaches were possible:
1. Hedge in the forward market. The 3-month forward exchange quote was $1.1060/ and the 6-month forward quote was $1.1130/.
2. Hedge in the money market. Larkin could borrow euros from the Frankfurt branch of its U.S. bank at 8.00% per annum.
3. Hedge with foreign currency options. August put options were available at a strike price of $1.1000/ for a premium of 2.0% per contract,
and November put options were available at $1.1000/ for a premium of 1.2%. August call options at $1.1000/ could be purchased for a
premium of 3.0%, and November call options at $1.1000/ were available at a 2.6% premium.
4. Do nothing. Larkin could wait until the sales proceeds were received in August and November, hope the recent strengthening of the euro
would continue, and sell the euros received for dollars in the spot market.
Larkin estimates the cost of equity capital to be 12% per annum. As a small firm, Larkin Hydraulics is unable to raise funds with long-term
debt. U.S. T-bills yield 3.6% per annum. What should Larkin do?
Assumptions
90-day Forward rate, $/
180-day Forward rate, $/
US Treasury bill rate
Larkin's borrowing rate, euros, per annum
Larkin's cost of equity
Options on euros
August maturity options
November maturity options
Values
$1.1060
$1.1130
3.600%
8.000%
12.000%
Strike ($/euro)
$1.1000
$1.1000
Today is May 1
Exchange Rate
($/)
$1.0800
$1.1000
Date
April 1
May 1
Call Option
3.0%
2.6%
Put Option
2.0%
1.2%
August Receivable
2,000,000
November Receivable
2,000,000
2,000,000
$1.1060
$2,212,000
1.03
$2,278,360
$4,504,360
2,000,000
$1.1130
$2,226,000
----$2,226,000
2,000,000
1.02
1,960,784
$1.1000
$2,156,863
1.06
$2,286,275
$4,528,582
2,000,000
1.04
1,923,077
$1.1000
$2,115,385
1.06
$2,242,308
2,000,000
($44,000)
1.06
($46,640)
2,000,000
($26,400)
1.06
($27,984)
$2,200,000
1.03
$2,266,000
$4,391,376
$2,200,000
---$2,200,000
2,000,000
???
2,000,000
???
The money market hedge provides the highest certain outcome. If Larkin Hydraulics believes the euro will strengthen versus the dollar over the
coming months, and it is willing to take the currency risk, the put option hedges could be considered.
Spot
45.8300
60.9611
1.8250
30.7192
1.4793
1.3302
1.9677
60-Day Forward
46.7000
61.9000
1.8100
30.9500
1.4800
1.3255
1.9617
Turkish lira
Exposure
369,825 TL
----369,825 TL
30.9500
INR 11,446,084
US dollar
Exposure
369,825 TL
1.4793
$250,000
46.7000
INR 11,675,000
Euro
Exposure
369,825 TL
1.9677
187,948
61.9000
INR 11,633,964
Choosing the currency of invoice is a question of which hedge, if any, Lapura uses. If the 60-day forward rates are applied to
the three different currency of invoice choices, the greatest INR proceeds result from using a dollar currency of invoice and
covering the exposure with a 60-day forward rate to sell dollars for rupees.
Although Lapura could leave the receivable uncovered, given the volatility of exchange rate markets, and how "cheap"
forwards are at this time (meaning they differ little from the current spot rate as a result of such low interest rates in the
dollar, euro, and yen markets), it would mean taking on unneeded risk.
A money market hedge would be extremely difficult to accomplish in the immediate time frame. The need for a bank
relationship, the establishment of a line of credit in order to secure a loan, and the unattractive interest rates (the Turkish lira
borrowing rate would cut severely into the value of the receivable), all make the money market hedge impractical for this
sale.