Question

Suppose you work in the finance division of a Norwegian

multinational shipping company. Today your firm just signed a contract

to export gas to Italy using one of your ships. The contract commits the

Italian government to pay 250 million euros (EUR) in 3 months. Given

the uncertainty relative to the pandemic, as part of the finance division

you are asked to come up with the best hedging option comparing

forward, money market instruments, and option contracts.

a. (10 points) Show detailed steps of the hedging strategy using a

forward and compute the revenues in NOK for the firm.

The forward rate is F(NOK/EUR) = NOK/EUR 2.25.

b. Perform the same analysis of point a), but now use

money market instruments to hedge your exposure. Show the

revenues in NOK for the firm

You need the following data:

- 1-year interest rate in Norway: 2.5%

- 1-year interest rate in Euro zone: 1%

- Current spot rate, S(NOK/EUR) = NOK/EUR 2.242

c. Are the results in a) and b) the same or do they differ?

Answer in one line.

d. Lastly, perform the hedging using options and compute

the minimum amount of revenues in NOK for the firm.

You have the two following options you can choose:

- Euro option, maturity 3 months

Listed options          Strike                           Premium

- Call option:           NOK/EUR 2.2                  NOK/EUR 0.001

- Put option:          NOK/EUR 2.2                   NOK/EUR 0.001

Assume that the size of each contract is EUR 250,000. When

computing the premium, use interest rates as in point b).

Answer 1

Ans (A)

to heading the 250 million EUR reciviable in 3 month. shipping company should entered in a 3 month forward contract to sell the 250 million ERU.

revenues in NOK= 250,000,000*2.25

= 562500000 NOK

Ans(B)

borrow the 249376559 ERU with the interest rate of1%p.a.

repayment after 3 month = 249376559*1*3/1200+249376559

=250,000,000

convert the ERU 249376559 into NOK using spot rate

=249376559*2.242

=559102245 NOk

invest 559102245 NOK with interest rate of 2.5%

= 559102245*2.5*3/1200+559102245

= 562596634 NOK

Ans(3)

no ans (a) and ans(b) is not same. there is difference of 96634 NOK