(a) Hedgers and Speculators have a symbiotic relationship. Explain what this means. The treasurer of a UK company, UVW has to pay $625,000 into a Eurodollar account in one month's time. The CME Sterling Currency Futures (STG) expiring in a month's time is currently priced at $1.25. The treasurer takes a hedged position by selling the STG futures and holding them to expiry. (b) How many contracts does she sell? The futures expire at the EDSP of $1.28. Compare in sterling the cost for the company in paying the $625,000 debt in her hedged versus unhedged position. (c) Comment on the decision to hedge.

(a) Hedgers and Speculators have a symbiotic relationship. Explain what this means. The treasurer of a UK company, UVW has to pay $625,000 into a Eurodollar account in one month's time. The CME Sterling Currency Futures (STG) expiring in a month's time is currently priced at $1.25. The treasurer takes a hedged position by selling the STG futures and holding them to expiry. (b) How many contracts does she sell? The futures expire at the EDSP of $1.28. Compare in sterling the cost for the company in paying the $625,000 debt in her hedged versus unhedged position. (c) Comment on the decision to hedge.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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1. The following Information should be used for Questions 1 and 2. The treasurer of X wants to hedge an exposure to currency risk. X is a company whose domestic currency is the euro, and the company must make a payment of US $500 000 to a US supplier in 6 months' time. The following market rates are available: Exchange rates: $ per €1 Spot= 1.604 ± 0.002 6 months forward= 1.570 ± 0.004 6 month interest rates: Euro Borrowing= 4.8%. Euro Deposits= 4.4% US dollar Borrowing= 2.5%. US dollar Deposits= 2.0%. What would be the euro cost to X if he hedges through a forward contract? (a) Euro 326, 495 (b) Euro 319, 285 (c) Euro 313, 525 (d) Euro 333, 295 2. What would be the cost to X if he hedges through the money market? (a) USD 634, 631 (b) USD 631, 634 (c) Euro 316, 634 (d) Euro 316, 436
Fred Bankman is a hedge fund manager. He has obtained the following exchange rate and interest rate quotations: Bid Ask Spot rate(dollars per euro) 1.0867 1.0871 One-year forward rate(dollars per euro) 1.1078 1.1083 Deposit Loan One -year euro interest rate 3.212% 3.356% One-year dollar interest rate 5.215% 5.316% Is there any arbitrage opportunity? if so, explain how Mr Bankman might make use of the opportunity and express his arbitrage profit in dollars. If not, explain why not.
Suppose you are the treasurer of a U.S. multinational firm that wants to hedge the foreign exchange risk associated with your firm's sale of equipment to a Swiss firm worth CHF1,000,000. The receivable is due in six months. You want to ensure that Swiss francs are worth at least $0.70 when the francs are received so you want a strike price of $0.70. How many options contracts do you need to hedge this risk? Do you want a call or put on Swiss francs? When will you exercise the options? When will you let the options expire?
1. A farmer enters a contract to sell her produce at a fixed price in the future and the future market price turns out to be five times as high as the agreed fixed price. The farmer regrets entering into the futures contract. This is an example of efficient risk sharing. question: true or false? 2. Sam-Bankman Fried is the founder of crypto currency exchange FTX. He raised US$420 million from an array of major investors in October 2021. When he pitched to clients, he usually was dressed in a t-shirt. Question: What you wear is not taken into account by professional investors. True or False? 3. “Cooped up at home by stay-at-home orders during the anxious early days of the pandemic, many people used their newfound free time and stimulus checks to pick up a new hobby. Some turned to fitness or learning to play an instrument, while others found a rather unhealthy and risky new side hustle: day trading. Inspired by stupendous returns posted on Reddit’s WallStreetBets and TikTok by random…
As the chief financial officer of a U.S. firm, you expect to receive payment of €1 million in 90 davs. The current spot rate is $1.40 per euro. Your firm will incur losses on the deal if the dollar weakens to less than $1.10 per euro. Please list at least two derivatives and discuss your detailed strategy to hedge against this foreign exchange risk.
Assume that you are running an Australia based company which has an account payable of EUR 125,000 due in three months. You decide to hedge out the associated foreign exchange risk using futures contracts. A futures contract of EUR125,000 is selling at A$1.5410 per euro. Suppose the next three days’ settlement prices are A$1.5399, A$1.5480, and A$1.5410. The initial margin of your performance bond account is $2,000 and maintenance margin is $1,500. What is your margin account balance at the end of the first day and what is the balance of this account at the end of the third day?
On 25 July of a particular year, an American firm decided to close its account at an Australian bank on 28 August. The firm is expected to have 4 million Australian dollars in the account at the time of the withdrawal. It would then covert the funds to U.S. dollars and transfer them to a New York bank. The September Australian dollar futures contract was priced at $0.7571. Determine the outcome of a futures hedge if on 28th August the spot rate was $0.7237 and the futures rate was $0.7250. All prices are in U.S. dollars per Australian dollar. The Australian dollar futures contract covers 100,000 Australian dollars
In each of the following cases, indicate whether it would be appropriate for an FI to buy or sell a forward contract to hedge the appropriate risk. • A commercial bank plans to issue CDs in three months. • An insurance company plans to buy bonds in two months. • A thrift is going to sell Treasury securities it holds in its investment portfolio next month. • A U.S. bank lends to a French company: the loan is payable in euros. • A finance company has assets with a duration of six years and liabilities with a duration of 13 years.
Please answer both subparts. 1. The following Information should be used for Questions 1 and 2. The treasurer of X wants to hedge an exposure to currency risk. X is a company whose domestic currency is the euro, and the company must make a payment of US $500 000 to a US supplier in 6 months' time. The following market rates are available: Exchange rates: $ per €1 Spot= 1.604 ± 0.002 6 months forward= 1.570 ± 0.004 6 month interest rates: Euro Borrowing= 4.8%. Euro Deposits= 4.4% US dollar Borrowing= 2.5%. US dollar Deposits= 2.0%. What would be the euro cost to X if he hedges through a forward contract? (a) Euro 326, 495 (b) Euro 319, 285 (c) Euro 313, 525 (d) Euro 333, 295 2. What would be the cost to X if he hedges through the money market? (a) USD 634, 631 (b) USD 631, 634 (c) Euro 316, 634 (d) Euro 316, 436
1. A fund manager expects a surge in the Turkish stock market in a month and wishes to invest $10 million. However, because he is uncertain about the direction of the USD/TRY exchange rate, he does not want to accept exchange rate risk. He plans to employ forward swap to eliminate the exchange risk. On the other hand, a Turkish bank anticipates a USD/TRY depreciation at the end of the month and has agreed to a swap contract with the fund. Spot Exchange Rate Today 28.10-28.50 USD/TRY Based on quotation information above, what is the swap exchange rate? a) 28.90 TRY b) 29.9 TRY c) 29.40 TRY d) 29.20 TRY Swap Points 70/90(30 days)
Sheridan is a Canadian company that conducts many transactions in $US. Because the price of $US fluctuates daily, Sheridan often enters into futures contracts as a way to manage risk. On September 1, 2023, Sheridan entered into a future contract to sell US $101,000 for CDN $1.20, which was the market value on September 1. The broker with whom Sheridan arranged the contract required a 20% deposit, which Sheridan paid in cash. On December 31, Sheridan's year-end, the price per $US was CDN $1.25. On January 1, Sheridan closed out the contract at the same exchange rate, settling without delivering the cash. Prepare the journal entries to record the futures contract. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem. If no entry is required, select "No Entry" for the account titles and enter O for the amounts. List all debit entries before credit entries.)
Suppose you are working as a treasurer in Citibank and your bank has taken a PKR250 million loan. The interest on the loan is KIBOR+50bp paid semiannually. The duration of the loan is four years. As you will have to pay interest, you are worried that in the future interest rates are likely to increase and you want to hedge this position by entering into a Swap contract. You ask Bank Al-Habib whether they would be willing to enter into a swap agreement and they send you these semi-annual swap rates: Period Bank Pays Bank Receives 2 years 3.34 3.37 3 years 4.01 4.04 4 years 4.47 4.50 5 years 4.79 4.82 6 years 5.02 5.05 Consider the following questions: What is the company’s cost of funds?

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