1. HEDGING TRANSACTION EXPOSURE
DW Computers December 2012

2. INTRO - RECAP DW Inc. is purchasing computer parts from Japan.
Manufactures computers in LA, California
Has problem with mismatched inflows & outflows.
Inflows: USD | Outflows: Foreign denominations
DW Usually never hedges for currency risk.
2011 Expenditures of $7M USD due to strengthening JPY against USD.
In 12/2012, DW Inc. places ¥200M JPY order of computer parts.
Hires Popescu, Hagi & Associates (PHA) for help with specialized derivatives to minimize mismatched inflow/outflow currency risk prior to going public to increase company valuation by WallStreet.

3. Part 1: Let’s work the numbers.
December 2012: The total ordering cost is ¥200M.
Normal order delivery takes 2 months.
Anticipated delivery sometime in April 2012 (4 months).
Payment is due 30 days after delivery. (Sometime in May 2012)
Todays exchange rate is (USD/JPY)

4. Pay ¥200M Yen to Japanese supplier.
TIMELINE
Dec order parts ¥200M JPY
Dec 6th parts expected to arrive April 17th
Select hedging strategy
Parts arrive at DW.
Payment due in 30 days.
Pay ¥200M Yen to Japanese supplier.

5. TRANSACTION PARAMETERS
Category
Total
Amount Due
¥200M Yen
Exchange Rate ST
Transaction Exposure
2.49 MM Dollars
Order date
December 2012
Delivery date
April 17th
Payment Due
30 Days after delivery

6. Normal Distribution (99% CI)
Calculated Ranges
Calculated Ranges
Type of Calculation
Minimum
Maximum
Historical 1-Month (%)
-9.627%
17.295%
Historical 5-Month (%) %
27.91%
Normal Distribution (99% CI)
$2.294M
$2.693M
Simulation (99% CI)
$2.292M
$2.925M

8. VALUE AT RISK Value At Risk 1 Month Interval 5 Month Interval
Total Exposure
$2.494M
$2.494
Value at Risk
-$ 0.177M
-$ 0.394M

9. PHLX Options Recommendation Buy Contracts (1M JPY/Contract)
200 Contracts (Naïve Hedging)
Options to Buy/Sell
Buy June $.008 $ /JPY
Premium = $0.916M
Exercise Price (Exercised in May) = 200,000,000 $0.008USD = $1.6M
Total Payment = $2.516M

10. OTC vs. PHLX Option Options to Buy/Sell Premium = $0.816M for Call
Buy June $.009 $ /JPY
Premium = $0.816M for Call
Exercise Price (Exercised in May) = 200,000,000 $0.009USD = $1.8M
Total Payment = $2.616M
PHLX Payment: $2.516M
OTC Payment: $2.616M
*The puts are cheaper in the OTC market, while the calls are cheaper in the traded market

11. FORWARDS VS OPTIONS Cost USD .008 JPY/USD + Premium $ 2.516M
Forward Contract
$ 2.512M
Option Contract
Exchange Rate
JPY/USD

12. Recommendations
We recommend buying the six month forward contract at the exchange rate of $ /JPY.

13. May 2013 Outcomes Three Month Forward Outcome
March Forward Rate = $ /JPY = $2,494,511
June Forward Rate = $ /JPY = $2,124,435
May outcome = $ /JPY = $2,008,000
Gain/Loss = - $486,511

14. May 2013 Outcomes 6-month forward and June Future Outcomes
TE for May 6th = $2.008M
December Month Forward = $2.512M
Gain/Loss = -$ 0.504M
December 2012 June Futures = $2.514M
Gain/Loss = -$ 0.506M

15. May 2013 Outcomes Futures and Open Position Outcomes
December 2012, OTC June .009 Call + Premium = $1.8M + $0.816M= $2.616M
Gain/Loss = -$ 0.608M
December 2012, PHLX June .008 Call + Premium = $1.6M + $0.916M= $2.516M
Gain/Loss = -$ 0.508M
TE for December 6th = $2.494M
Gain/Loss = $0.486M

16. Appendix

17. TRADED OPTION VS OTC OPTION
The puts are cheaper in the OTC market, while the calls are cheaper in the traded market
Traded
OTC
JPY June
0.008
PUT
8,140
0.009
21,040
18,420
0.010
28,500
27,720
CALL
916,600
725,100
816,200
590,840
639,520

18. FORWARDS VS OPTIONS

19. PART TWO
It is now, May 6. The Japanese parts arrived on April 11 and payment is due in five days. The exchange rate is USD/JPY. The 1-mo. and 3-mo. forward USD/JPY rates are , and , respectively. U.S. short interest rates for two months or less are The CME June futures trades at
The PHLX June options have the following prices (in USD cents):
JPY June .008 (Call)
JPY June .009 (Call)
JPY June .010 (Call)
JPY June .008 (Put)
JPY June .009 (Put)
JPY June .010 (Put)

20. THE END!