Assume you are an importer in Turkey. You have bought a machine from Germany worth of €250,000. Your payment to the German firm (in €) is due in three months. Three-month maturity TRY interest rate is 20% (annual) and same maturity EUR interest rate is '-0.50%' (annual). For simplicity assume that the borrowing and lending interest rates are the same. Spot exchange rate is 10.45TL/€ and three-month forward exchange rate is 11.00 TL/ €in the foreign exchange market. The company is cash rich and in case of excess cash inflow the company invests the proceeds at an interest earning account. There are also currency options available in the financial market. Exercise price of a call option with a maturity of 3 months is 11.0OTL per EUR. The call premium is 0.33TL per EUR. Exercise price of a put option with a maturity of 3 months is 11.OOTL per EUR. The put premium is 0.25TL per EUR. b). Describe your possible strategies to hedge this transaction exposure. Please show your computations and pick the best strategy under the given financial conditions above. Draw a chart, showing possible outcomes of your transaction exposure strategies under different levels of exchange rate possibilities in three months.
Assume you are an importer in Turkey. You have bought a machine from Germany worth of €250,000. Your payment to the German firm (in €) is due in three months. Three-month maturity TRY interest rate is 20% (annual) and same maturity EUR interest rate is '-0.50%' (annual). For simplicity assume that the borrowing and lending interest rates are the same. Spot exchange rate is 10.45TL/€ and three-month forward exchange rate is 11.00 TL/ €in the foreign exchange market. The company is cash rich and in case of excess cash inflow the company invests the proceeds at an interest earning account. There are also currency options available in the financial market. Exercise price of a call option with a maturity of 3 months is 11.0OTL per EUR. The call premium is 0.33TL per EUR. Exercise price of a put option with a maturity of 3 months is 11.OOTL per EUR. The put premium is 0.25TL per EUR. b). Describe your possible strategies to hedge this transaction exposure. Please show your computations and pick the best strategy under the given financial conditions above. Draw a chart, showing possible outcomes of your transaction exposure strategies under different levels of exchange rate possibilities in three months.
Chapter21: International Cash Management
Section: Chapter Questions
Problem 3ST
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