Question

An American MNE, US Standard, sells industrial equipment to a buyer in Germany for 2 million...

An American MNE, US Standard, sells industrial equipment to a buyer in Germany for 2 million euro (EUR), with payments to be made in 90 days. The spot exchange rate on the sale date is USD1.2/EUR.

(a) Due to this transaction, what kind of risk does US Standard expose to?

(b) Discuss and calculate how US Standard can hedge the above risk by using (i) money market contracts and (ii) options market contracts.

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Homework Answers

Answer #1

(a)

US standard is exposed to currency risk of US dollar increasing or Euro decreasing over the spot rate which may decrease the inflow.

(b)

(i)US standard can go into borrow sell invest money market hedging, in which it can borrow present value of euro receivable, sell it to get dollars and invest in dollars for 90 days to get a risk free inflow after 90 days in dollars.

(ii)US Standards can also hedge via option contracts in which it can buy put option on Euro or buy call option on $.

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