Question

Scenario:

Considering the calculations you have done so far, you need to attend to a number of import transactions for goods that companies in the United States expressed interest in.

The first transaction is for the import of good quality wines from France, since a retail liquor trading chain customer in the United States, for who you have been doing imports over the past five years has a very large order this time. The producer in France informed you that the current cost of the wine that you want to import is and €2,500,000. The producer in France will only ship goods in three months’ time due to seasonal differences but payment will have to be conducted six months from now.

The second transaction is for the export of 3d printers manufactured in the U.S.A. The country where it will be exported to is Canada. The payment of CAD 2,500,000 for the export to Canada will be received twelve months from now.

You consider different transaction hedges, namely forwards, options, and money market hedges.

You are provided with the following quotes from your bank, which is an international bank with branches in all the countries:

Forward rates:

Currencies	Spot	3 month (90 days)	6 month (180 days)	9 month (270 days)	12 month (360 days)
$/€	1.14134	1.14743	1.15354	1.15969	1.16587
$/CAD	0.76465	0.76559	0.77475	0.76748	0.76843

Bank applies 360 day-count convention to all currencies (for this assignment apply 360 days in all calculations).

Annual borrowing and investment rates for your company:

Country	3 month rates		6 months rates		9 month rates		12 month rates
	Borrow	Invest	Borrow	Invest	Borrow	Invest	Borrow	Invest
United States	2.687%	2.554%	2.713%	2.580%	2.740%	2.607%	2.766%	2.633%
Europe	0.505%	0.480%	0.510%	0.485%	0.515%	0.490%	0.520%	0.495%
Canada	2.177%	2.069%	2.198%	2.090%	2.220%	2.112%	2.241%	2.133%

Bank applies 360 day-count convention to all currencies. Explanation – e.g. 3 month borrowing rate on $ = 2.687%. This is the annual borrowing rate for 3 months. If you only borrow for 3 months the interest rate is actually 2.687%/4 = 0.67175% (always round to 5 decimals when you do calculations). Furthermore, note that these are the rates at which your company borrows and invests. The rates are not borrowing and investment rates from a bank perspective.

Option prices:

Currencies	3 month options				6 month options
	Call option		Put option		Call option		Put option
	Strike	Premium in $	Strike	Premium in $	Strike	Premium in $	Strike	Premium in $
$/€	$1.14399	$0.00174	$1.15088	$0.00174	$1.15010	$0.00173	$1.15702	$0.00152
$/CAD	$0.76292	$0.00392	$0.76828	$0.00392	$0.77205	$0.00387	$0.77747	$0.00387

Bank applies 360 day-count convention to all currencies. (Students also have to apply 360 days in all calculations). Option premium calculations should include time value calculations based on US $ annual borrowing interest rates for applicable time periods e.g. 3 month $ option premium is subject to 2.687%/4 interest rate.)

Calculate the exchange rates that will apply if the money market hedges are used for export to Canada.

Table 6: Canada export with money market hedge:

	PV of foreign currency to be borrowed	Converted at spot to $ for investment	$ amount with interest invested	Exchange rate locked in with transaction
Show answers in this row:
Show your workings in the columns below the answers

Answer 1

	PV of foreign currency to be borrowed	Converted at spot to $ for investment	$ amount with interest invested	Exchange rate locked in with transaction
Answers	2,445,203.00	1,869,724.47	1,918,954.32	0.76758
Workings	Receivable/(1+1year canada borrowing rate) = CAD2,500,000/1.02241	PV of foreign currency to be borrowed*Spot rate = 2,445,203*0.76465	Investment*(1+1year US invest rate) = 1,869,724.47*1.02633	Maturity value/ CAD receivable = 1,918,954.32/2,500,000