summer 2018 exam 21 Protected Vi Sav this PC ailings Review

summer 2018 exam 21 Protected Vi Sav this PC ailings Review View Add-ins H ell me what you want to do Managing currency risk An Indian company borrowed money by issuing a foreign bond in the United States. It must make an interest payment of $1 million in 90 days. Using the information below, explain how the company can hedge the risk associated with this payment Spot exchange rate:68.655 USD/INR Is It 2.25% 670% 3-month forward premium 90 call option on 1 million 241.4S put option on 21 million 101.31 1. using a money market hedge. 2. using a forward hedge. 3. using a currency option. 4. using leading or lagging.

Solution

1) Money market hedge:

2) Forward Hedge:
Calculate forward price given 3 months forward premium
forward price=spot price+forward premium=68.655+0.900=69.555 INR/$
-Exposure@forward hedge =$1M*69.555 INR/$=INR 69,555,000/-

3) Currency Option:

4)Leading ot lagging: Accelerating transactions are known as Leading while slowing it down is Lagging.
If spot price is < theoritical forward price, then indian company is better off by paying $1M@spot and viceversa.
As per IRPT, theoritical forward price=S_o(1+R_h)/(1+R_f)=68.655(1+1.675%)/(1+0.5625%)=69.4145 INR/$
Since spot price is less than theoritical forward price, it is better off for indian company to lead the payment.

5)Exposure Netting: Netting is beneficial only if the indian company has $ receipts. Since it has only $ obligation, netting is not beneficial to the indian company.