- 20 Marks
FM – Nov 2023 – L3 – SB – Q2 – Foreign Exchange Risk Management
Analyze hedging methods for foreign exchange risk involving a future CHF transaction.
Question
About one year ago, you were employed by Tesco, an American company based in New York. You work online from home in Nigeria and are a member of the international treasury of Tesco.
Tesco supplies medical equipment to the USA and Europe and also buys some basic raw materials from Europe. It is currently 30 November 2024. On 31 May 2025, Tesco is due to receive CHF16.3 million from a Swiss customer and also to pay CHF4.0 million to a Swiss supplier.
Exchange rates (quoted as US$/CHF1):
- Spot: 1.0292 – 1.0309
- Three months forward: 1.0322 – 1.0341
- Six months forward: 1.0356 – 1.0378
Annual interest rates available to Tesco:
- Switzerland: 3.2% (investing), 4.4% (borrowing)
- USA: 4.6% (investing), 5.8% (borrowing)
Currency futures (contract size CHF125,000, futures price quoted as US$ per CHF1):
- Future price: December – 1.0306, March – 1.0336, June – 1.0369
Currency options (contract size CHF125,000; exercise price quotation US$ per CHF1, premium in US cents per CHF1):
| Calls | Puts | |||||
|---|---|---|---|---|---|---|
| Dec | Mar | June | Dec | Mar | June | |
| 1.0375 | 0.47 | 0.50 | 0.53 | 0.74 | 0.79 | 0.86 |
Required:
- a. Calculate the net receipt if hedged using a forward contract. (4 Marks)
- b. Calculate the net receipt if hedged using money market hedging. (8 Marks)
- c. Calculate the net receipt if hedged using futures. (10 Marks)
- d. Calculate the net receipt if hedged using options. (8 Marks)
(Total: 30 Marks)
Find Related Questions by Tags, levels, etc.
- Tags: Foreign Exchange, Forward Contract, Futures, Hedging, Money market, Options
- Level: Level 3
- Topic: Foreign Exchange Risk Management
- Series: NOV 2023