Question 3 You are an analyst who is analysing the financial activities of a Malaysian company in the food industry. You have collected several information as follows: The company expects the following cash flows to/from its foreign partners in the coming month: - Expected receipts from customers in United States : USD3 million - Expected payments to suppliers in United States : USD2 million - Expected payments to suppliers in Hong Kong : HKD500,000 The company uses soybeans as raw material in one of its production lines. It expects to purchase 16,000 bushels of it is worried about the potential price hike of the soybeans due to a current short supply in the market. The company currently has an outstanding loan balance of MYR3 million. This is a 7% fixedrate loan with monthly repayments for the next 10 years. The company foresees the government to reduce interest rate due to the recent contracting economy and it wishes to hedge against the interest rate risk exposure. The current Kuala Lumpur Interbank Offer Rate (KLIBOR) is 3%. Current derivatives market: - 1-month USD forward is trading at an exchange rate of USD/MYR 4.2050. - 1-month HKD forward is trading at an exchange rate of HKD/MYR 0.5640. - 6-month soybean futures is available in the market. The soybean futures contract size is 5,000 bushels per contract. - KLIBOR futures is available in the market. Its contract size is MYR1 million per contract. Required: Suggest and illustrate how the company can perform internal or external hedging activities by using derivatives to manage the following: (a) foreign exchange risk, (b) soybean price risk, (c) interest rate risk.
Question 3
You are an analyst who is analysing the financial activities of a Malaysian company in the food
industry. You have collected several information as follows:
The company expects the following cash flows to/from its foreign partners in the coming month:
- Expected receipts from customers in United States : USD3 million
- Expected payments to suppliers in United States : USD2 million
- Expected payments to suppliers in Hong Kong : HKD500,000
The company uses soybeans as raw material in one of its production lines. It expects to purchase 16,000 bushels of it is worried about the potential price hike of the soybeans due to a current short supply in the market.
The company currently has an outstanding loan balance of MYR3 million. This is a 7% fixedrate loan with monthly repayments for the next 10 years. The company foresees the government to reduce interest rate due to the recent contracting economy and it wishes to hedge against the interest rate risk exposure. The current Kuala Lumpur Interbank Offer Rate (KLIBOR) is 3%.
Current derivatives market:
- 1-month USD forward is trading at an exchange rate of USD/MYR 4.2050.
- 1-month HKD forward is trading at an exchange rate of HKD/MYR 0.5640.
- 6-month soybean futures is available in the market. The soybean futures contract size is 5,000 bushels per contract.
- KLIBOR futures is available in the market. Its contract size is MYR1 million per contract.
Required:
Suggest and illustrate how the company can perform internal or external hedging activities by using derivatives to manage the following:
(a) foreign exchange risk,
(b) soybean price risk,
(c) interest rate risk.
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