Blades, Inc. Case Study Analysis Paper

1002 Words Dec 23rd, 2007 5 Pages
Blades, Inc. Case Study Analysis PaperFactors of Foreign Exchange RatesExchange rates are the amount of one country's currency needed to purchase one unit of another currency and the foreign exchange market is the monetary nexus between countries that makes it possible for global trade to be accomplished more efficiently than barter. The foreign exchange market is where one countries' currency is exchanged for another because each nation uses its own monetary unit. Therefore, if people in one nation want to acquire goods in another nation, currency must be replaced from one country for the other country to accommodate the business deal.

Foreign exchange rates, at the most basic level, are derived from long-term economic fundamentals.
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If Blades uses call options to hedge its yen payables, I believe the firm should use the call option with the exercise price of $0.00792 rather than the call option with the exercise price of $0.00756 because the amount paid for yen if option is exercised is $472.50 less than the exercise price of $0.00756.

2. Blades should allow its yen position to be unhedged because the tradeoff to be hedged is not much different from if it were unhedged. However, if the company is uncomfortable leaving the position open given the historical volatility of the yen, then hedging is the best option.

3. Assuming there were speculators who attempted to capitalize on their expectation of the yen's movement over the two months between the order and delivery dates by either buying or selling yen futures now and buying or selling yen at the future spot rate, the expectation on the order date of the yen spot rate by the delivery date would be $0.0072, if speculations were correct.

4. If the firm shares the market consensus of the future yen spot rate, its optimal choice, purely on a cost basis should be $0.0072 given this expectation and given that the firm made a decision.

5. The choice I made as to the optimal hedging strategy may not turn out to be the lowest-cost alternative in terms of actual costs incurred because the firm is speculating the risk. The firm is hedging due to being unsure of what the market will do. The perfect hedge would reduce the risk to nothing. This would be

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