Suppose that you have revenues denominated in Japanese Yen expected in 6 months. How would you hedge this risk using money market instruments? How would a money market hedge compare to a forward hedge?
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Suppose that you have revenues denominated in Japanese Yen expected in 6 months.
How would you hedge this risk using
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- Your company has just exported crude palm oil to a Japanese customer. You will receive 30 million yen in 90 days. Do you have any exposure? Suppose forward, futures and options were available on the currency, which would be the best instrument to hedge? Explain why.A Japanese exporter has a €1,000,000 receivable due in one year. To hedge the position, you will buy put options on euro True or False?Suppose that your company will be receiving 30 million euros six months from now and the euro is currently selling for 1 euro per dollar. If you want to hedge the foreign exchange risk in this payment, what kind of forward contract would you want to enter into?
- Suppose you borrow RM10,000,000 in the interbank money market at a KLIBOR yield of 6% p.a for aterm of 1 month. Should you buy or sell KLIBOR futures contract if you were to hedge against interest rate risks?Suppose you borrow RM10,000,000 in the interbank money market at a KLIBOR yield of 6% p.a for a term of 1 month. Should you buy or sell KLIBOR futures contract if you were to hedge against interest rate risks?Suppose money invested in a hedge fund earns 1% per trading day. There are 250 trading days per year. With an initial investment of $100, what will be your annual return assuming the manager puts all of your daily earnings into a zero-interest-bearing checking account and pays you everything earned at the end of the year? *Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.
- Suppose that the invester of GMO has an extra cash reserveof $700,000 to invest. The interest rate is 1.49% per year in the United States and 6.47% per year in Mexico. Currently, the spotexchange rate is 19.780 Pesos per dollar and the one-year forwardrate is €19.790 per dollar. The investor does not wishto bear any exchange risk. Assess how he can construct an arbitrage portfolio based on your calculation.Suppose that the return on a U.K. treasury bill is eight percent annum and the return on a U.S. treasury bill is eight percent annum and that you had $1,000,000 earmarked for short term investment for a period of a month. In which of the securities would you place your money? (Assume you are not a speculator). Show your calculations. 1 British pound (spot) $1.7748 1 British pound (30-day futures) $1.7776Assume the following information: 180-day U.S. interest rate 8% 180-day British interest rate 9% 180-day forward rate of British pound $1.50 Spot rate of British pound $1.48 Assume that Riverside Corp. from the United States will receive 400,000 pounds in 180 days. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated revenue for each type of hedge.
- A financial institution has just bought 4-month European call options on the Chinese yuan.Suppose that the spot exchange rate is 14 cents per yuan, the exercise price is 15 cents per yuan,the risk-free interest rate in the United States is 1.5% per annum, the risk-free interest rate in Chinais 3.5% per annum, and the volatility of the yen is 16% per annum. Calculate the gamma of thefinancial institution’s position. Check the accuracy of your gamma estimate for a 0.1 cent increasein yuan.Suppose that you are a U.S.-based importer of goods from the United Kingdom. You expect the value of the pound to increase against the U.S. dollar over the next 30 days. You will be making payment on a shipment of imported goods in 30 days and want to hedge your currency exposure. The U.S. risk-free rate is 5.0 percent, and the U.K. risk-free rate is 4.0 percent. These rates are expected to remain unchanged over the next month. The current spot rate is $1.80. Required: Whether you should use a long or short forward contract to hedge the currency risk. Calculate the no-arbitrage price at which you could enter into a forward contract that expires in 30 days. Move forward 10 days. The spot rate is $1.83. Interest rates are unchanged. Calculate the value of your forward position.An investor wants to hedge against currency price movements that could offset the yield s/he expects to earn on a lending spread created by simultaneous long and short positions in bonds. a. A currency worth $0.80 that could increase in value by 2% per period over the next two months. The domestic and foreign risk-free interest rates are 6% and 8%, respectively. If the strike price is also $0.80, then use the binomial pricing theorem to price both the call and put options. Verify your answer using the put-call parity relationship.
