1. Mark Fielding-Pritchard
Casasophia
Mark Fielding-Pritchard
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2. Hedge Required Receipt of $20m Forward Rate 1.3623 Receive €14681054
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3. Future 1 Buy euros 5 month (20m/1.3698)/125000=117
Today we buy month euros
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4. Future 2 Current basis risk 1.3618 – 1.3698 = $0.008
4/5 will disappear leaving
Assume spot in 4 months is
Futures price is
Bought
1.3698
Sold
1.3639
Loss
0.0059
Loss x x 117
$86288
Receipt $
@1.3623 €
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5. Options Effective Price 1.36 + 2.80 1.388 Best for us 1.38 + 2.23
Buy euros, calls
5 month expiry
(20m/1.36)/125000= 117 contrcats
Buy month calls
Effective Price
1.388
Best for us
1.4023
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6. Options 2
Spot is I will exercise $ €
x 117 x 1.36
x 177
80746 €
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7. Summary € Forward €14681054 Future €14617714 Options €14705746
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8. Part B Mhs Requirement 2.64bn US$ receipt in euros €14705746
Exchange at spot. 116=
1,705,866,536
Interest for 2 months 1.7bn x 2/12 x 10.8%
Shortfall
Borrow
This assumes they have access to borrowings in host country. African Government may force them to borrow in dollars and transfer dollars to Mazabia
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9. b)
Using Fisher the annual decline in the currency is 8.4% but the interest rate differential is 9.1% so you are better to convert early to local currency
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10. c) Calculation of future exchange rates
6 months /2
133.27
18 months
144.46
30 months
156.59
42 months
168.25
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11. Receipts $s
12%
133.27
1.5bn
144.46
156.59
168.25
Total
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12. c)
With wide ranges of estimates of inflation the swap would be beneficial from a risk perspective
Before entering into it you would need to do some research on the bank to ensure it had access to the required foreign currency
And that if they have it they will give it to you
Insurance may be adviseable
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