We have to make a payment of $100 million to the French government in half a yea

Question

                            We have to make a payment of $100 million to the French government in half a year, if we win the bid we put in to acquire airwaves from it. If our bid                             is accepted, we shall need to spend 2 billion euros in the next 3 years building infrastructure.                         

                            The present ER is $/e.75 and the $/e F= /$.72. Describe the different hedging techniques we could use for the half year foreign exchange exposure. What                             is/are the appropriate hedging technique(s) to undertake for the

Explanation / Answer

TECHNIQUES FOR MANAGING TRANSACTION EXPOSURE:-

INTERNAL HEDGING TECHNIQUES:[THE FIRM WILL HEDGE IN THE NORMAL COURSE OF BUSINESS]-

A]INVOICING

B]LEADING & LAGGING

C]OUTSOURCING

D]NETTING

EXTERNAL HEDGING TECHNIQUES:[THE FIRM WILL HEDGE BY ENTERING INTO A SEPARATE CONTRACT]-

A]FORWARD COVER

B]MONEY MARKET COVER

C]FUTURES COVER

D]OPTIONS COVER

IN THE GIVEN CASE WE CAN USE THE FOLLOWING HEDGING TECHNIQUES:-

1]INVOICING:-MAKE THE INVOICE IN DOLLAR CURRENCY

2]FORWARD COVER:-BUY THE FRENCH CURRENCY{e] 6 MONTHS FORWARD I.E. AT $/e F= 0.72.

3] FUTURES & OPTIONS

FORWARD COVER WOULD BE THE MOST APPROPRIATE HEDGING TOOL FOR THE HALF YEAR FOREIGN CURRENCY EXPOSURE.

WE WOULD FORWARD BUY e100million at $/e F= 0.72.

THE PREVIOUS EXPOSURE WAS ONLY TRANSACTION EXPOSURE.

THE OTHER EXPOSURE IS DIFFERENT BECAUSE IT IS NOT CERTAIN THAT IT WOULD INVOLVE FOREIGN CURRENCY OR NOT BECAUSE IT ALL DEPENDE ON WHETHER THE BID IS ACCEPTED OR NOT.

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.