Download
1 / 18
180 likes | 429 Vues
Merton Electronics Corp. By Alexzander Downs Michael Jordan Kevin Grant Takshal Bhansali. Outline. Current Situation Currency risk exposure Each hedging method defined What happens if Hedging if and when speculation conclusion. Current Situation.
E N D
Merton Electronics Corp • By Alexzander Downs • Michael Jordan • Kevin Grant • Takshal Bhansali
Outline • Current Situation • Currency risk exposure • Each hedging method defined • What happens if • Hedging if and when • speculation • conclusion
Current Situation • Merton’s sales has grown by 12% but the earnings fell by 40%. • The competition is intensifying due price cutting by the competitors. • More then 60% of the total sales are imported from Asia. • Payments have to be made in either yen or Taiwanese dollars. • In last 18 months Merton has hedged at the future rates.
Currency risk exposure if left unheadged the dollar value of the payable is subject to fluctuations in the value of the Yen value at the current forward price is $2,385,600
Each hedging method defined • According to the banker there were two basic choices
Each hedging method defined • Forward Contract Hedge • Merton has committed themselves to pay ¥300,000,000 in 90 days ¥300,000,000 x $.7952 = $2,385,600 100
Each hedging method defined • Money Market Hedge • Buy yen today on the spot market and place in a yen time deposit until needed to pay suppliers. • ¥300,000,000 = So e^(.0375) (.25) • So = ¥297,200,642.50 • Convert ¥297,200,642.50 into dollars • ¥297,200,642.50 x $.7849 = $2,332,727.84 100
Each hedging method defined • We now need to know how much it is going to cost Merton to borrow $2,332,727.84 for 90-days. • Fo = $2,332,727.84 e^(.0875)(.25) • Fo = $2,384,318.48
Each hedging method defined • [OTC] 90-day [OTC] 90-day Yen Call Option • ¥300,000,000 x .0249 = $74,700 100 Max (St – K, 0) $74,700 (St .7852, 0)
Each hedging method defined • Yen Futures Hedge [CME] • ¥300,000,00 = 24 contracts 24 contracts x .0208 = $62,400 12,500,000 100 Max (St - $.80, 0)
What happens if • What happens if the company hedges a particular exposure but subsequently finds that the period at risk changes (the exposure is shorter or longer than the hedge, or the amount of risk changes)? • Optimal Hedge Ratio • Roll hedge forward
What happens if • If it turns out that Merton needs the forward contract for a longer period they can roll hedge forward. Each time they roll it forward Merton will face basis risk. • Basis = spot price of an asset – its future price • Basis risk therefore is the the uncertainty as to what the basis will be at maturity.
What happens if • Swaps • Interest rate Swaps • Currency Swaps
Speculation • Companies should have a comparative advantage to profit from speculation. • Nonfinancial companies do not have a comparative advantage at predicting currency and interest rate movements.
speculation • A nonfinancial company may want to try to profit from movements in commodity prices. • However, the company should be aware of the risks. • Example: Energy Traders
Conclusion • Should prepare budgets monthly due to nature of currency risk. • Merton has a 90 day currency risk exposure so they should hedge when the order is placed. • The extra cost of the options is worth eliminating the risk.
