1. Case 2: Hedging Transaction Exposure Sarah Scott and George Stoeckert

2. The Case  December 2012: DW orders part from Japan, incurs a payable of 200,000,000.00 JPY  Parts are received in April  Payment due in May

3. Part I

4. Associated Risk: Best/Worst Case Scenario JPYExchange RateMultiplierOutcome Range Best Case Scenario 200,000,000.0086.641.194209023 $ 1,932,997.11 $ 960,478.83 Worst Case Scenario 200,000,000.0086.640.797795674 $ 2,893,475.94

5. 99% Confidence Interval: $ 62,624.94 JPY Transaction Exposure Today +/- Confidence IntervalOutcomeRange Upper Bound 200,000,000.00 $ 2,308,402.59 $ 2,371,027.52 $ 125,249.87 Lower Bound 200,000,000.00 $ 2,308,402.59 $ 2,245,777.65 Associated Risk: Simulated Distribution

6. Normal Distribution 99% Confidence Interval:0.007616709 JPYExchange RateMultiplierOutcomeRange Upper Bound 200,000,000.0086.641.007616709 $ 2,290,953.06 $ 35,166.90 Lower Bound 200,000,000.0086.640.992383291 $ 2,326,119.96 Associated Risk: Normal Distribution

7. Value at Risk Calculation VaR: Exchange RateJPYασΔtΔtVaR 4mo86.64 200,000,000.002.3263478740.0684593361 $ 367,636.73 5mo86.64 200,000,000.002.3263478740.0684593361.25 $ 459,545.91 Δt in terms of 4 months

8. PHLX Options Estimated Spot Rate CallsOptionPremium Total Option Price Total Premium Price Total Combined Price April Spot Rate April Close Out April Close Out + Premium ProbabilityExercise Option? 0.012312687 PHLX Option June.008 0.0080.004583 $ 1,600,000.00 $ 916,600.00 $ 2,516,600.00 0.012312687 $ 2,462,537.36 $ 3,379,137.36 8.21%YES 0.012527612 PHLX Option June.008 0.0080.004583 $ 1,600,000.00 $ 916,600.00 $ 2,516,600.00 0.012527612 $ 2,505,522.35 $ 3,422,122.35 14.37%YES 0.012742537 PHLX Option June.008 0.0080.004583 $ 1,600,000.00 $ 916,600.00 $ 2,516,600.00 0.012742537 $ 2,548,507.35 $ 3,465,107.35 10.82%YES Estimated Spot Rate CallsOptionPremium Total Option Price Total Premium Price Total Combined Price April Spot Rate April Close Out Close Out + PremiumProbabilityExercise Option? 0.012312687 PHLX Option June.009 0.0090.0036255 $ 1,800,000.00 $ 725,100.00 $ 2,525,100.00 0.012312687 $ 2,462,537.36 $ 3,187,637.36 8.21%YES 0.012527612 PHLX Option June.009 0.0090.0036255 $ 1,800,000.00 $ 725,100.00 $ 2,525,100.00 0.012527612 $ 2,505,522.35 $ 3,230,622.35 14.37%YES 0.012742537 PHLX Option June.009 0.0090.0036255 $ 1,800,000.00 $ 725,100.00 $ 2,525,100.00 0.012742537 $ 2,548,507.35 $ 3,273,607.35 10.82%YES Estimated Spot Rate CallsOptionPremium Total Option Price Total Premium Price Total Combined Price April Spot Rate April Close Out Close Out + PremiumProbabilityExercise Option? 0.012312687 PHLX Option June.01 0.010.0029542 $ 2,000,000.00 $ 590,840.00 $ 2,590,840.00 0.012312687 $ 2,462,537.36 $ 3,053,377.36 8.21%YES 0.012527612 PHLX Option June.01 0.010.0029542 $ 2,000,000.00 $ 590,840.00 $ 2,590,840.00 0.012527612 $ 2,505,522.35 $ 3,096,362.35 14.37%YES 0.012742537 PHLX Option June.01 0.010.0029542 $ 2,000,000.00 $ 590,840.00 $ 2,590,840.00 0.012742537 $ 2,548,507.35 $ 3,139,347.35 10.82%YES

9. Frequency Distribution: 4-Month Changes

10. OTC Options: Estimated Spot Rate CallsOptionPremium Total Option Price Total Premium Price Interest EarnedTotal Combined Price March Spot Rate March Close Out March Close Out + Premium Probability Exercise Option? 0.012309668OTC Option March.009 $ 0.0090 $ 0.0040810 $ 1,800,000.00 $ 816,200.00 $ 77,449.03 $ 2,538,750.97 0.012309668 $ 2,461,933.60 $ 3,278,133.60 10.43%YES 0.012508258OTC Option March.009 $ 0.0090 $ 0.0040810 $ 1,800,000.00 $ 816,200.00 $ 77,449.03 $ 2,538,750.97 0.012508258 $ 2,501,651.56 $ 3,317,851.56 12.66%YES 0.012706848OTC Option March.009 $ 0.0090 $ 0.0040810 $ 1,800,000.00 $ 816,200.00 $ 77,449.03 $ 2,538,750.97 0.012706848 $ 2,541,369.52 $ 3,357,569.52 12.48%YES Estimated Spot Rate CallsOptionPremium Total Option Price Total Premium Price Interest EarnedTotal Combined Price March Spot Rate March Close Out March Close Out + Premium Probability Exercise Option? 0.012309668 OTC Option March.01 $ 0.0100 $ 0.0031976 $ 2,000,000.00 $ 639,520.00 $ 77,449.03 $ 2,562,070.97 0.012309668 $ 2,461,933.60 $ 3,101,453.60 10.43%YES 0.012508258 OTC Option March.01 $ 0.0100 $ 0.0031976 $ 2,000,000.00 $ 639,520.00 $ 77,449.03 $ 2,562,070.97 0.012508258 $ 2,501,651.56 $ 3,141,171.56 12.66%YES 0.012706848 OTC Option March.01 $ 0.0100 $ 0.0031976 $ 2,000,000.00 $ 639,520.00 $ 77,449.03 $ 2,562,070.97 0.012706848 $ 2,541,369.52 $ 3,180,889.52 12.48%YES

11. Frequency Distribution: 3-Month Changes

12. Forward Alternative Requirement (Due March 15th) 200,000,000.00 Current Exchange Rate JPY/USD (12/15/12)0.01247 Interest Rate US 6mo0.26205 Interest Rate Japan 6mo0.15158 Forward Rate Dec 6- May 170.013666 6-Month Forward Contract Cost $ 2,733,247.10

13. Cost Comparison: Hedging Alternatives

14. Part II Hedging Transaction Exposure

15. What would be the effective total cost (in USD) of the Japanese parts if you had advised…  Using three months forward?  Long 3 Month Forward (Dec & March)  (Dec-Mar) 200,000,000 JPY *.012494 (3 Month FR) = $2,498,800.00  Rolled into new 3 month Forward and calculated the new 3 Month Forward Rate in March 2015:.01061253  (Mar-June) 200,000,000 JPY *.0161253 = $2,122,505.97  Cash Outflows from transactions = $374,955.82 + $106,580.16  Short 1 Month Forward (May-June)  Shorted 1 Month Forward to Close Position with opposite transactions  (May-June) 200,000,000 JPY *.010464 (1 Month Forward) = $2,092,800  Cash inflow from transactions = $76,874.19  Cost of Forward Premiums = $404,461.79  Value of JPY in May = $2,008,000.00  Total Cost (excluding other undocumented fees) = $2,412,461.79

16.  Using six months forward?  (Dec-June) Long 6 Month JPY Forward  200,000,000 JPY * 0.012561 (6 Month FR) = $2,512,200.00  Value of JPY in June = $2,015,925.65  Cash Outflow of $496,274.19  (May-June) Short 1 Month JPY Forward  200,000,000 JPY *.010464 (1 Month FR) = $2,092,800  Cash Inflow of $76,874.19  Cost of Forward Premiums = $419,400  Value of JPY in May = $2,008,000.00  Total Cost (excluding other undocumented fees) = $2,427,400 What would be the effective total cost (in USD) of the Japanese parts if you had advised…

17.  Using June Futures?  Long (Dec-June) 200,000,000 JPY *.01257 (June Future Rate) = $2,514,000.00  Cash Outflow  Close position with Short (May-June) 2000,000,000 JPY *.010002 = $2,000,400.00  Cash Inflow  Total Cost of Future Premiums = $513,600  Value of JPY in May = $2,008,000.00  Total Cost of Future = $2,521,600

18. What would be the effective total cost (in USD) of the Japanese parts if you had advised…  Using the OTC JPY Option?  Call Both Options  Invest JPY on March 17 th = 200,000,000 *1.04595 = 200,091,880 JPY  Interest Earned = 91,880 JPY  Purchase JPY for Payment = 200,000,000 *.01004 = $2,000,8000.00  Convert Interest = 91,880 JPY *.01004 = $922.47  OTC.009 Total Cost = $2,616,200 - $922.47 = $2,615,277.53  OTC.010 Total Cost = $2,639,520 - $922.47 = $2,638,597.53

19. What would be the effective total cost (in USD) of the Japanese parts if you had advised…  If the PHLX June Options had been…  Total Cost of JPY with (June.008 Call) = $2,009,300.00  Total Cost of JPY with (June.009 Call) = $2,011,840.00  Total Cost of Option (June.010 Call) = $2,590,840.00

20. What would be the effective total cost (in USD) of the Japanese parts if you had advised…  Left Position Open?  Value of JPY in USD (Dec 2012) = $2,308,402.59  Additional Interest Income (Low Interest Rate Assumed) = $4,439.83  $2,308,402.59 * (.23%/6*12*(150/360)) = $4,439.83 Cash Inflow  Value of JPY in May = 200,000,000 (JPY) *.01004 (St) = $2,008,000 USD  Total Cost of JPY Less Additional Interest Income = $2,003,560.17

21. Final Comparison Open Position Is Most Risky but Least Expensive  Left Position Open  PHLX  3 Month Forwards  6 Month Forwards  Futures  OTC  $2,003,560.17  $2,009,300.00  $2,412,461.79  $2,427,400.00  $2,521,600.00  $2,615,277.53