Currency Hedge

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Submitted By Sileiny14
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Pages 4
Main details about the Currency Hedge Case: * John will buy 8,000 cases for € 1,030,000 * John will sell all 8,000 cases for $199 for each case ($ 1,592,000) * Spot Exchange Rate is $1.32/ € * The Forward rate for November is $1.37/ € * The Forward rate for December is $1.39/ € * Forward contracts can be bank forward rate of the month * Future contract can be multiple of $ 62,500, expiring 3rd Friday of each month. * November option can be multiple of $62,500 buying the $ 1.37/€ costing 3 cents per Euro. * December option can be multiple of $62,500 buying the $ 1.39/€ costing 3 cents per Euro. * Euro Interest per three months in annual rate 6% * Dollar Interest per three months in annual rate 6.5%
€ 1,030,000 ($ 1.37) = 1,411,100 November
€ 1,030,000 ($ 1.39) = 1,431,700 December
Differences in the Forward rates for November Spot Ex Rate | Unhedget Position | Forward Hedge | Gain or losses | 1.22 | 1,256,600 | 1,411,100 | 154,500 | 1.32 | 1,359,600 | 1,411,100 | 51,500 | 1.37 | 1,411,100 | 1,411,100 | 0 | 1.42 | 1,462,600 | 1,411,100 | -51500 | 1.52 | 1,565,600 | 1,411,100 | -154,500 |

Differences in the Forward rates for December Spot Ex Rate | Unhedget Position | Forward Hedge | Gain or losses | 1.24 | 1,277,200 | 1,431,700 | 154,500 | 1.34 | 1,380,200 | 1,431,700 | 51,500 | 1.39 | 1,431,700 | 1,431,700 | 0 | 1.44 | 1,483,200 | 1,431,700 | -51,500 | 1.55 | 1,586,200 | 1,431,700 | -154,500 |

In this currency hedge no one can know for sure what the spot of rate is going to be in the future, unless there could exist a perfect market, which does not. John will have to decide whether to hedge or not to the present forward spot rate. The basic use of this hedge currency is to eliminate exposure of uncertainty. There is going to be an uncertainty of what the future…...

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