MTB Ltd. is an Australian exporter, sold a special raw
material to a manufacturing
company based in Switzerland. The sale is denominated in Swiss
francs with
payment due upon delivery in three (3) months, amount is CHF
200,000.
Required:
a. How can MTB Pty Ltd. use the currency options to hedge
foreign-currency
exposures resulting from international transactions?
b. Describe the key benefit and the key drawback of using currency
options
rather than future and forwards contracts?
a] | As it is a sale denominated in CHF, the MTB can |
buy a put option to sell CHF 200,000 after 90 days; | |
that is the time when the sale value in CHF would | |
be received. | |
The put option would specify the exchange rate; | |
that is the number of AUD receivable per CHF | |
after 90 days. This rate is fixed. | |
But, there would be a cost for this contract [right | |
to sell] which is called the 'option premium', which | |
is payable upfront. | |
Being an option, on the date of expiry of the option, | |
MTB can compare the option price with the then | |
spot price and | |
*can exercise the option if, the spot price is less | |
than the option price, or | |
*can allow the option to lapse if, the spot price is | |
more than the option price. In such a case more | |
AUD can be realized by selling the CHF received in | |
the then spot market rate. | |
b] | Key benefit: |
The option contract gives a right to sell the CHF but | |
not an obligation to do so. If the MTB wants it can | |
let the option lapse and thn sell the CHF received | |
in the spot market. | |
Both forwards and futures need to be settled. | |
Key drawback. | |
The option premium becomes a sunk cost and is | |
irrelevant for decision making at the time of expiry | |
of the option. |
MTB Ltd. is an Australian exporter, sold a special raw material to a manufacturing company based...
CASE 1-5 Financial Statement Ratio Computation Refer to Campbell Soup Company's financial Campbell Soup statements in Appendix A. Required: Compute the following ratios for Year 11. Liquidity ratios: Asset utilization ratios:* a. Current ratio n. Cash turnover b. Acid-test ratio 0. Accounts receivable turnover c. Days to sell inventory p. Inventory turnover d. Collection period 4. Working capital turnover Capital structure and solvency ratios: 1. Fixed assets turnover e. Total debt to total equity s. Total assets turnover f. Long-term...