Question

Suppose you work for a French company that plans to receive a cash inflow of 10mln Rubles in 5 months. The company's management is concerned with the fact that Russian currency is quickly depreciating and wants to hedge currency risks associated with this transaction. Suppose that current exchange rate is 72 Rubles/Euro, the interest rates are 10% in Russia and 4% in France. a) [7] Explain in details which Forward contract your company should enter to fully hedge currency risks. Be sure to calculated the fair Forward price, Notional amount of the deal and the cash flows from the forward. b) [8] Suppose that market Forward exchange rate is 75 Rubles/Euro. Will your company choose to use the Forward or will it prefer to hedge using Money Market?

Answer 1

We are also going to receive 10 min Rubble which we use to pay out standing loan in Russian market so this is how we hedge our to currency Risk a) Company should enter into forward fell contract in which we are to going to buy Euro @ 72/ Euro so in furture le. after 5 month when be receive 10mn Rubel we conto buy Euro from the Ruble @ 72 = a 10 72 = 0.1388 mn Ewro 1 6 ) If forward Exchange Rate is 75 Rubles/ Euro than after 5 month be we are on going to Receive 787 18/75 = 0.1333 mn Euro only which in dess Re than money market hedge ie 0.1352 mn Ewoo so Money market hedge is morre beneficial thom four ward con Exchange Rate . so

We are also going to receive 10 min Rubble which we use to pay out standing loan in Russian market so this is how we hedge our to currency Risk a) Company should enter into forward fell contract in which we are to going to buy Euro @ 72/ Euro so in furture le. after 5 month when be receive 10mn Rubel we conto buy Euro from the Ruble @ 72 = a 10 72 = 0.1388 mn Ewro 1 6 ) If forward Exchange Rate is 75 Rubles/ Euro than after 5 month be we are on going to Receive 787 18/75 = 0.1333 mn Euro only which in dess Re than money market hedge ie 0.1352 mn Ewoo so Money market hedge is morre beneficial thom four ward con Exchange Rate . so

Aus og To hedge the currency Risk we con to go for forward market fedge our money marked hedge =) Money market hedge We are going to Receive 10 mn Rubles In future we 4 g. we know that Russian currency is quickly depreciating so wow what we do is we borrow money in Russian market * Invest It is at the rate of 10% foor 5 mot Month Convert it into Euro & Invest it in Euro marked at the rate of 4%. Interest Rate a When after 5 month we receive 10mn Rubles we puy our out standing liability. = how much we need to bourown in Russian market 2. of Effective interest hat = 10%. & 5 month 12 = 4,167% We need to bourrow = 10 (1 + 4.1677) = 9.599.mn Rebles Ruble Vs Euro Exchange Rute. convert this Rubles in at current re 72 l Euro - -> 9,599 70 72 Invest this Euro in after five month we have -0,133 mn Euro European market @ 14/12 ²5) = 1.007% Euro In hund = litt 0.133X (1+ 1.667) - 0.1352 mn Euro