1 / 39

PHA : Hedging Transaction Exposure for DW Inc.

PHA : Hedging Transaction Exposure for DW Inc. PROPOSED SOLUTION. Case Background: Hedging. Forwards Futures Options Open positions. in advance (part 1) in hindsight (part 2). Part I: DW’s Hedging Problem . June DW orders parts valued at JPY 200 million

altsoba
Télécharger la présentation

PHA : Hedging Transaction Exposure for DW Inc.

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. PHA: Hedging Transaction Exposure for DW Inc. PROPOSED SOLUTION

  2. Case Background: Hedging • Forwards • Futures • Options • Open positions in advance (part 1) in hindsight (part 2)

  3. Part I: DW’s Hedging Problem • June • DW orders parts valued at JPY 200 million • Delivery in 2 months, payment within 30 days of delivery • June 5th • Confirmation of delivery in October • Expected delivery is Oct. 17

  4. In Advance Scenario (Part 1) Uncertainty over exact Delivery and Payment Date • Hedge exchange • rate risk with: • PHLX options • OTC options • Forward contract 30 days payment JPY 200M Order confirmation Projected delivery Time June-5 Nov-17 Oct-17

  5. Part I: Range Estimates of Transaction Exposure: Data • Monthly USD/JPY Exchange Rate Data: 1/31/71 – 8/31/02 • 367 Observations • Monthly Exchange Rate Percentage Changes • Descriptive Statistics Std. Deviation 0.033389951 Minimum -0.109192201 Maximum 0.147448569

  6. Part I: Risk Analysis of Transaction Exposure • Sensitivity Analysis Worst Case Scenario JPY 200M x .008502 USD/JPY x (1 + .147449)= USD 1,951,122 Best Case Scenario JPY 200M x .008502 USD/JPY x (1 - .109192) = USD 1,514,473

  7. Part I: Risk Analysis of Transaction Exposure • Confid. Interval Based on Normal Distribution Upper Bound 200,000,000 JPY x .008502 x (1 + .065464) = USD 1,811,700 Lower Bound 200,000,000 JPY x .008502 x (1 - .065464) = USD 1,589,100

  8. Part I: Hedging Strategies Proposed • Forward Contracts • PHLX Options • Over-the-Counter-Options

  9. Part I: Hedging Instruments : Data • Spot Price (USD/JPY) .008502 • Forward Contracts 6-Month Forward Rate: .008668 • CME Futures • T=Dec; Ft,Dec = .008679 • PHLX Options: Dec Calls Contract: premium: USD .000481/unit. X= .0086 Contract: premium USD .000391/unit. X= .0088 Contract: premium USD .000313/unit. X= .0090 • OTC (Over-the-Counter) Options T= Nov 17th: premium: USD .000345/unit X= Strike Price .0088

  10. Forward/Futures contracts Forward (OTC) Contracts 1mo .008530 3mo .008585 6mo .008668 CME Futures Sep .008596 Dec .008679 sell forward OTC t June-5 Nov-17 Sep-5 Oct-17 Dec-5

  11. PHLX Options Call option A: X=0.0088, premium = 0.000391 B: X=0.0090, premium = 0.000313 sell option if not exercised exercise if in-the-money t June-5 Dec-15 Nov-17 Oct-17

  12. OTC Options Call option X=0.0088, premium = 0.000345 European style exercise option if in-the-money and pay back credit borrow 200M JPY and pay bill t June-5 Nov-20 Nov-17 Oct-17

  13. Part I: Contract Size • PHLX Call Option Contracts Needed: JPY 200M/6.25M = 32 Contracts • OTC Call Options Needed: 1 Contract • Forward Contracts Needed: 1 Contract

  14. Part I: Strategy Comparison: Additional Data Exchange Rate Distribution • Using Monthly Percent Change Data • Create a Frequency Histogram • Probability Distribution Observed: St+180 Probability USD.008142 9 % USD .008663 79% USD .00925412%

  15. Part I: Exchange Rate Distribution Histogram

  16. Part I: Exchange Rate Distribution Histogram

  17. Exchange Rate DistributionSpot Rate Forecast Calculation • -.08(2) + -.04(31) = -1.40 -1.40/33 = -4.24% 33/367 = 9% .008502 * (1-.0424) = .008142 USD/JPY • .00(153) + .04 (138) = 5.52 5.52/291 = 1.897% 291/367 = 79% .008502 * 1.01897 = .008663 USD/JPY • .08(35) + .12(7) + .16(1) = 3.80 3.80/43 = 8.84% 43/367 = 12% .008502 * 1.0884 = .009254 USD/JPY

  18. Option Carrying Cost Calculation OTC Call Option (.0088 Strike Price) Carrying Cost: USD .000345 * .040850 * 180/360 = USD .00000705/unit PHLX Call Option (.0086 Strike Price) Carrying Cost: USD .000481 * .04085 * 180/360 = USD .00000982/unit PHLX Call Option (.0090 Strike Price) Carrying Cost: USD .000272 * .04805 * 180/360 = .USD .00000555/unit

  19. OTC vs. PHLX Options

  20. Part I: Instrument Comparison • Forward Purchase JPY 6 Months (.008668USD/JPY) * JPY 200M = USD 1,733,600 • OTC Nov Option Strike Price .0088 .008985 USD/JPY * JPY 200M = USD 1,796,955 • PHLX Dec Option Strike Price .0086 .00905USD/JPY* JPY 200 M = USD 1,809,912 • PHLX Dec Option Strike Price .0090 .008755145.USD/JPY* JPY 200M = USD 1,786,857

  21. Part I: Recommendation • OTC Nov Option Strike Price .0088 .008985 USD/JPY * JPY 200M = USD 1,796,955 Why? - Exact Date - Option flexibility, especially good with uncertain arrival date. - Caps expenses at .009152 USD/unit * JPY 200M = USD 1,830,409

  22. Part II: Comparisons • November 6 • Japanese parts arrived Oct. 11 • Payment due in 5 days (Nov 11) • Exchange rate: .00907 USD/JPY • The cost to DW, Inc. will vary depending on the hedging approach undertaken…

  23. Hindsight: Hedging Evaluation • 3-mo forward contract (Rollover on Sep) • Dec futures • No Hedge • OTC Options • CME Dec Options

  24. 1) 3-mo Forwards Sep 5: Rollover , Buy JPY 200M at FJune 5, Sep 5. Sell JPY 200M at St=Sep 5 Buy Dec 5 forward Sell Dec 5 forward here, and change USD for JPY at St=Nov 6 time June-5 Dec-5 Nov-11 Aug-5 Sep-5 July-5 Oct-11

  25. 3-month forward contracts • DW would have taken a long position in the forward contract, to offset their short position Amount to be paid for parts JPY 200,000,000 Ft=Jun 5, Sep 5: 0.008530 USD/JPY Rollover to another 3-mo contract on Sep 5: Ft=Sep 5, Dec 5: 0.00907 USD/JPY Sell Forward contract on Nov 6 Ft=Nov 6, Dec 5: 0.009162 USD/JPY USD paid for parts 1,746,228

  26. 1) 3-mo forward June-5 Oct-11 sell forward Nov-11 Dec-5 t

  27. 2) Dec Futures Dec Futures Long Dec futures at Ft=June 5,,Dec =0.008679 USD/JPY, On Nov 6, Dec futures Ft=Nov 6,,Dec = 0.009162 USD/JPY SNov 6 = .00907 buy Dec future sell 39 day future time June-5 Dec-15 Nov-11 Oct-11 Nov-6

  28. 2) December futures contract • DW would have taken a long position in the futures contract, to offset their short position: 16 Dec contracts long. (=200M/12.5M) June 5 - Bought Dec futures @ .008679 USD/JPY Nov 6 - Sold Dec futures @ .009162 USD/JPY

  29. 2) December futures contract (Continued) Gain/(Loss) on Futures ContractsContractsUSD Long on June 5 (Ft, Jun) 0.008679 (16) (1,735,800) Sold on Nov 6 (Ft, Nov) 0.009162 16 1,832,400 => Gain/Loss on Futures (0.000483) 96,600 Gain Discounted Back 30 Days: 96,600/(1 + .0409 * 39/360) 96,174 Borrow JPY 200M @ St=Nov 6 = 0.00907 USD/JPY x JPY 200M = 1,814,000 Net cost = (1,814,000-96,174)*(1+.0409*5/360) = USD 1,718,857 USD paid for parts USD 1,718,857

  30. 3) Not hedged • DW would bought JPY at the prevailing Spot Rate when the payment was due. Amount to be paid for parts JPY 200,000,000 Spot rate at Nov. 6 (St=Nov 6) 0.00907 USD/JPY Borrow JPY 200M = 0.00907 USD/JPY x JPY 200M = = USD 1,814,000 Cost of loan = USD 1,814,000 x (1+.0409*5/360)= USD 1,815,030 USD paid for parts USD 1,815,00

  31. 4) OTC options (Situation St > X) Call option A: X=0.0088, premium = 0.000345 B: X=0.0090, premium = 0.000272 SNov 6 = .00907 Exercise t June-5 Nov-11 Nov-17 Oct-11 Nov-6

  32. 4) OTC options (Situation St < X) Call option A: X=0.0088, premium = 0.000345 B: X=0.0090, premium = 0.000272 SNov 6 = .0084 buy on spot market don’t exercise option t June-5 Nov-11 Nov-17 Oct-11 Nov-6

  33. 4) OTC JPY Option • DW would have bought a call option to cover payables Variables Amount (JPY) 200,000,000 Strike Price X 0.0088 Premium Premium0.000345 Interest Rate (US) i 4.085-4.090

  34. 4) OTC Nov JPY Option • Carrying costs = Pt * interest rate * (maturity/360) Fox X=.0088 => 0.000345*.04085*124/360 = = USD .00000485 Carrying cost is so small, for practical purposes can be ignored => only USD 970! • If St > X => Exercise: Both Options: Exercise! • For X=.0088 => Borrow to buy JPY = USD 1,829,971 Cost of loan = USD 1,829,971 x (1+.0409*5/360)= USD 1,831,010 • For X=.0090 => Borrow to buy JPY = USD 1,855,165 Cost of loan = USD 1,855,165 x (1+.0409*5/360)= USD 1,856,219

  35. 5) PHLX Options Call option A: X=0.0086, premium = 0.000481 B: X=0.0090, premium = 0.000313 SNov 6 = .00907 exercise option exercise since in-the-money t June-5 Dec-15 Nov-11 Oct-11 Nov-6

  36. 5) JPY Dec. Options (PHLX) • DW would have bought a call option to cover payables • Same procedure as the OTC Options Variables Amount (JPY) 200,000,000 Strike Price X 0.0086 Premium Premium0.000481 Interest Rate (US) iUSD,bid-ask 4.0850-4.090

  37. 5) JPY Dec. Options (PHLX) • Carrying costs = P * interest rate * (maturity/360) Fox X=.0086 => 0.000481*.04085*124/360 = = USD .00000677 • If St > X, Do Exercise • For X=.0086 => Borrow to buy JPY = USD 1,817,554 Cost of loan = USD 1,817,554 x (1+.0409*5/360)= USD 1,818,859 • For X=.0090 => Borrow to buy JPY = USD 1,863,481 Cost of loan = USD 1,863,481 x (1+.0409*5/360)= USD 1,864,539

  38. PHLX Options (Alternative Scenario: option out-of-the-money) Call option A: X=0.0086, premium = 0.000481 B: X=0.0090, premium = 0.000313 SNov 6 = .0084 Premium Call option SNov 6 = .0084 X = .0086 σ = .20 (annualized) T = 39/365 rf-USA = .0409; rf-JPY = .0028 premium = USD .00014831 Total received = USD 29,662 buy on spot market try to sell option do not exercise since out-of-the-money time June-5 Dec-15 Nov-11 Oct-11 Nov-6

  39. Part II: Summary ScenarioUSD paid for parts • 3 month Forward USD1,746,228 • Dec futures USD1,718,857 • No hedge USD 1,815,00 • OTC options X=88 USD 1,829,971 X=90 USD 1,855,165 • PHLX options X=86 => USD 1,818,859 X=90=> USD 1,863,481

More Related