Question

For this week, I want to reinforce your knowledge of foreign currency options by talking about hedging accounts receivable. We will look at the case of Mattel Toys.

Mattel is a U.S.-based company whose sales are roughly two-thirds in dollars (Asia and the Americas) and on-third in Euros (Europe). In September, Mattel delivers a large shipment of toys (primarily Barbies and Hot Wheels) to a major distributor in Antwerp, Belgium (in Europe). The accounts receivable, €30 million, is due in 90 days, standard terms for the toy industry in Europe. Mattel's treasury team has collected the following currency and market quotes. The company's foreign exchange advisors believe the euro will be at about $1.4200/€ in 90 days. Mattel's management does not use currency options in currency risk management activities.  

Current spot rates ($/€) = $1.4158

Credit Suisse 90-day forward rate ($/€) = 1.4172

Barclays 90-day forward rate ($/€) = $1.4195

Mattel Toys WACC ($) = 9.600%

90-day euro-dollar interest rate = 4.000%

90-day euro interest rate = 3.885%

90-day eurodollar borrowing rate = 5.000%

90 day euro borrowing rate = 5.000%

note: interest rates are per year, so you need to find the periodic interest rate for 90 days

(1) By Thursday night:

If your last name begins with A - L, create a new thread in this forum, and post your answer to the following questions:

1. What would the result be if Mattel chose to remain unhedged? Show how you arrived at your answer with numbers. Is this result certain or risky?

2. What would the result be if Mattel chose to pursue a forward market hedge? Show how you arrived at your answer with numbers. Is this result certain or risky, why?

Answer 1

Use the formula for calculating implied 90 days forward rate as shown in formula bar of excel sheet.

For calculating the spot rate pertaining to 90 days which is similar to present spot rate Use the formula as shown in formula bar and similar formula is used to calculate other spot rate as shown below.

For calculating the Settlement amount at Credit Suisse forward rate Use the formula as shown in formula bar and similar formula is used to calculate another settlement amount.