Pls do not handwrite the answer, this is for easy reading Question 4:- Ozfood Pt
ID: 2621343 • Letter: P
Question
Pls do not handwrite the answer, this is for easy reading
Question 4:-
Ozfood Pty Ltd, a cookie manufacturing company based in Sydney, has received an order today. i.e. 7 October 2014, to sell 10,000 boxes of its best-selling product to a Japanese client. The amount to be paid by the client is 3.45 million AUD, but the invoice needs to be issued in Japanese Yen(JPY). At today's FX price of 1 AUD=100 JPY, the amount invoiced is therefore 345 million JPY and will be payable on January 7th, 2015.
Laurie, OZfood's treasurer, is considering whether to hedge her receivable or not and has received the following quotations from her bank:
a) What is the risk for Ozfood on this transaction?
b) From the list of prices given above, select and describe an appropriate forward transaction and an appropriate option transaction that Laurie should enter to hedge her position/
c) Using the transaction selected above, compare the net proceeds in AUD received by Ozfood under the various hedging strategies ("do nothing", forward and option) when AUD/JPY on 7th January 2015 is 98,100 or 103. Results must be presented in the table below.
Do Nothing/Without hedge Forward Option
Hedge none
transaction
Expiry in 3 months(American option) Premium in JPY per AUD CALLS(AUD Call/JPY Put) Strike price Puts(AUD Put/JPY Call) 5.5 98 1.5 3.8 99 1.7 2.2 100 2.2 2 101 3.9 1.8 102 5.8
Explanation / Answer
Solution to part (a)
Today’s exchange rate = 1AUD = 100JPY
Amount to be paid = 3.45 million AUD
Invoiced amount = 3.45 * 100 = 345 million JPY
Payable at 3 months period
Risk = 3.45 * 99.75 = 344.1375 million
345 - 344.1375 = 0.8625 million AUD
Solution to part (b)
Appropriate forward transaction = 99.75 * 3.45 = 344.1375 million JPY
Solution to part (c)
Forward
Option
Hedge Transaction
NONE
Formula for AUD Net Proceeds
FX rate * amount
F – S * Amount
S – F * Amount
Less premium
Net AUD Proceeds
98 * 3.45 = 338.1
100 * 3.45 = 345
103 * 3.45 = 355.35
100 – 98 * 3.45 = 6.9
100 – 100 * 3.45 = 0 (No change)
100 – 103 * 3.45 = -10.35
98 – 100 * 3.45 = 6.9
100 – 100 * 3.45 = 0 (No change)
N/A
Spot AUD/JPY = 98, 100, 103
With options, they will only be exercised when a gain is expected, that is, when the then exchange rate is lower than the current one. In our case, when spot price is 98, then option will be exercised.
Forward
Option
Hedge Transaction
NONE
Formula for AUD Net Proceeds
FX rate * amount
F – S * Amount
S – F * Amount
Less premium
Net AUD Proceeds
98 * 3.45 = 338.1
100 * 3.45 = 345
103 * 3.45 = 355.35
100 – 98 * 3.45 = 6.9
100 – 100 * 3.45 = 0 (No change)
100 – 103 * 3.45 = -10.35
98 – 100 * 3.45 = 6.9
100 – 100 * 3.45 = 0 (No change)
N/A