Question

Financial Product Case Study

•  You work in the Treasury Derivate-Bank AG division. Which hedging instrument would you conclude under the following circumstances?

•  Your IT unit intends to purchase new hardware in mid-March next year. The planned transaction is to take place in USD, but has not yet been finally decided. You expect a rising USD exchange rate and receive an order to hedge it against exchange rate risks.

•  The credit unit has granted a fixed-interest GBP loan. You want to hedge the loan against interest rate and currency risks.

•  Interest rate swap

•  Payment of an invoice in JPY is due on 23 May of the following year. Your order is

  to fix the exchange rate valid today.

•  Foreignexchangeswap

Answer 1

Your IT unit intends to purchase new hardware in mid-March next year. The planned transaction is to take place in USD, but has not yet been finally decided. You expect a rising USD exchange rate and receive an order to hedge it against exchange rate risks.

In this case, as the currency is not yet finalised, one can go for money market hedge where one buys USD today and deposits it till March next year so that exchange rate is fixed.

The credit unit has granted a fixed-interest GBP loan. You want to hedge the loan against interest rate and currency risks.

In this case, one can go for Fixed-floating Interest rate swap for the period of the loan

Payment of an invoice in JPY is due on 23 May of the following year. Your order is

to fix the exchange rate valid today.

In this case, one should use JPY forward and one should buy JPY forward for May Next year

OR one can go for buying USD call options for March next year