Q4. (25%) Suppose you have business operation in scenario (A) and (B) as bellow.
ID: 2784094 • Letter: Q
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Q4. (25%) Suppose you have business operation in scenario (A) and (B) as bellow. Please describe yoedging strategy by using (1) future contracts and (2) option contracts. (Suppose future and option contracts are available in the market.) (A) You are owning three famous restaurant chain brand names in five Asia countries. All incomes are converted to U.S. dollar at the end of each month. At the end of each year, you will convert all U.S. dollar dominated income to your home currency. However, you are very concern about the possible volatility of exchange rate between the U.S. dollar and your home currency (B) You are managing five major brand ski gears (skis, boots...etc.) assembly facilities in your country. However, major parts of thase ski gears are imported from Europe and you pay Euro () to your parts suppliers at the end of each year. Due to the significant weight of those parts in your cost structure, you are concerning about the possible volatility of exchange rate between the Euro (E) and your home currency Bonus question)(15%) (With the completion of Q1 to Q4, feel free to answer this bonus question for extra 15% grades.) Choose an industry and apply the Porter's Five Forces framework to: (A) analyze the competitive advantage in an industry, and (B) identify which firms in this industry might be best positioned for successExplanation / Answer
A) Here he will convert US$ into HC at the end of year, means we face risk that home currency might appreciate or foreign currency might depriciate (i.e. we will receive less HC in terms of FC).
Hedging using options) To hedge this risk we should buy call option on Home currency or buy put option on foreign currency
Hedging using futures) To hedge this risk we should buy futures on Home currency or sell future contract on foreign currency
B) here we need to buy euro and sell HC means we face risk that FC might appreciate or HC might depriciate( One will have to pay more units of HC to buy one unit of FC)
Hedging using options) To hedge this risk we should buy call option on Foreign currency or buy put option on Home currency
Hedging using futures) To hedge this risk we should buy futures contract on Foreign currency or sell future contract on Home currency
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