Question

1. Dow Chemical has sold SFr 25 million in chemicals to Ciba-Geigy. Payment is due in 180 days. Spot rate: $0.7957/SFr 180-day forward rate: $0.8095/SFr 180-day U.S. dollar interest rate (annualized): 5% 180-day Swiss franc interest rate (annualized): 2% 180-day call option at $0.80/SFr: 2% premium 180-day put option at $0.80/SFr: 1% premium a. What is the hedged value of Dow's receivable using the forward market hedge? b. Explain how Dow can use the money market hedge? c. Explain the use of currency options to hedge its receivable?

Answer 1

­SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

17:18 © v ca 1x 2 ENG E 26-03-2020 26 ... o X 10 IP 10768 LIIK LILIM IN 764 765 766 a FORWARD HEDGE 767 GUARANTEED DOLLAR PROCEEDS = 25000000 x 0.8095 768 GUARANTEED DOLLAR PROCEEDS = 20237500 769 770 b MONEY MARKET HEDGE 771 AMOUNT RECEIVABLE = IN SFr 25000000 772 AMOUNT TO BE BORROWED TODAY = 25000000/1.01 773 AMOUNT TO BE BORROWED TODAY = 24752475.25 774 775 CONVERT IT INTO DOLLAR AT SPOT RATE = 19695544.55 [24752475.25*0.7957] 776 777 INVEST THIS AMOUNT AT 2.5% GUARANTEED DOLLAR PROCEEDS = 20187933.17 (19695544.55*(1+0.025)] 779 780 C PUT OPTIONS AS WE ARE EXPORTERS, WE WILL PREFER PUT OPTION 781 PREMIUM PAYABLE = 25000000 x 0.80 X 1% = 200000 782 783 NOW EXERCISE PRICE = 0.80 SO IF PRICE GOES BELOW 0.80, WE WILL EXERCISE OPTIONS, OTHERWISE NOT 785 GUARANTEED DOLLAR PROCEEDS = 19800000 [25000000*0.80 - 200000] 786 787 778 784 ܓܩܩܒ ... port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLO Q DIR right clean YIELD bond portfolio WACC | RESI DIV POLICY SPECIFIC NAME | D... + :

17:18 © v ca 1x 2 ENG E 26-03-2020 26 ... o X 10 IP 10768 LIIK LILIM IN 764 765 766 a FORWARD HEDGE 767 GUARANTEED DOLLAR PROCEEDS = 25000000 x 0.8095 768 GUARANTEED DOLLAR PROCEEDS = 20237500 769 770 b MONEY MARKET HEDGE 771 AMOUNT RECEIVABLE = IN SFr 25000000 772 AMOUNT TO BE BORROWED TODAY = 25000000/1.01 773 AMOUNT TO BE BORROWED TODAY = 24752475.25 774 775 CONVERT IT INTO DOLLAR AT SPOT RATE = 19695544.55 [24752475.25*0.7957] 776 777 INVEST THIS AMOUNT AT 2.5% GUARANTEED DOLLAR PROCEEDS = 20187933.17 (19695544.55*(1+0.025)] 779 780 C PUT OPTIONS AS WE ARE EXPORTERS, WE WILL PREFER PUT OPTION 781 PREMIUM PAYABLE = 25000000 x 0.80 X 1% = 200000 782 783 NOW EXERCISE PRICE = 0.80 SO IF PRICE GOES BELOW 0.80, WE WILL EXERCISE OPTIONS, OTHERWISE NOT 785 GUARANTEED DOLLAR PROCEEDS = 19800000 [25000000*0.80 - 200000] 786 787 778 784 ܓܩܩܒ ... port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLO Q DIR right clean YIELD bond portfolio WACC | RESI DIV POLICY SPECIFIC NAME | D... + :